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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from __ to __
Commission file number 000-26485
PARADYNE NETWORKS, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 75-2658219
- ------------------------ ---------------------
(State of incorporation) (I.R.S. Employer
Identification Number)
8545 126TH AVENUE NORTH LARGO, FLORIDA 33773
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(Address of principal executive offices, including zip code)
(727) 530-2000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act; Common Stock, $.001
par value.
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's outstanding common stock
held by non-affiliates as of February 29, 2000 was $763,146,676.
The number of shares outstanding of the Registrant's Common Stock as of
February 29, 2000 was 31,325,382.
Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the Annual
Meeting of Shareholders to be held on May 25, 2000 to be filed within 120 days
after the end of the registrant's fiscal year, are incorporated by reference
into Part III, Items 10-13 of this Form 10-K.
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PARADYNE NETWORKS, INC.
Annual Report on Form 10-K
For the Fiscal Year Ended December 31, 1999
Table of Contents
<TABLE>
<S> <C> <C>
Item Page
Number Number
PART I
1. Business 1
2. Properties 22
3. Legal Proceedings 23
4. Submission of Matters to a Vote of Security Holders 23
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters 23
6. Selected Financial Data 26
7. Management's Discussion and Analysis of Financial Condition and
Results of Operations 28
7a. Quantitative and Qualitative Disclosures About Market Risk 46
8. Financial Statements and Supplementary Data 47
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures 47
PART III
10. Directors and Executive Officers of the Registrant 47
11. Executive Compensation 47
12. Security Ownership of Certain Beneficial Owners and Management 47
13. Certain Relationships and Related Transactions 47
PART IV
14. Exhibits, Financial Statements, Financial Statement Schedules,
and Reports on Form 8-K 48
</TABLE>
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PART I
ITEM 1: BUSINESS
OVERVIEW
We are a leading developer, manufacturer and distributor of broadband
network access products for network service providers, commonly referred to as
NSPs, and business customers. Paradyne operates in a single business segment.
We offer solutions that enable high-speed connectivity over the existing
telephone network infrastructure and provide for cost-effective access speeds
of up to 45 megabits per second, or Mbps. We believe that demand for
high-speed, broadband transmission will continue to increase as more business
and residential users find narrowband access technologies inadequate to meet
their high-bandwidth requirements. Our objective is to maintain and build upon
our position as one of the leaders in the broadband access market by focusing
on next generation digital subscriber line, more commonly known as DSL, service
level management, more commonly known as SLM, and other broadband access
solutions.
We have a long history of technological innovation. We have been
issued over 200 U. S. patents, hold over 165 patents and have over 110 U. S.
patent applications pending. Our equipment has been sold to over 60% of the
Fortune 500 companies and in businesses in over 150 countries. We estimate that
sales to NSPs represented approximately 65% of our total revenues in 1999. With
our reputation and history as a supplier of access solutions to a large
customer base, we believe that we are well positioned to provide broadband
access solutions to NSPs and business customers as they upgrade their networks.
INDUSTRY BACKGROUND
Over the past several years, data traffic generated by computer users accessing
the Internet or business networks has increased significantly. Industry
analysts believe that the volume of this data traffic, referred to as wide area
network traffic, will continue to expand rapidly due to four key trends:
- the dramatic growth in the use of the Internet;
- the proliferation of distributed computing applications, such
as electronic mail, electronic transaction processing,
enterprise resource planning and inter-enterprise information
transfer based on Web-technologies;
- the deregulation of the telecommunications services industry
which has increased the number of service providers and
intensified competition; and
- the continued deployment of high capacity fiber optic networks
and the emergence of high-volume bandwidth network access
technologies that increase the ability to transfer large
volumes of information.
In order to accommodate increasingly high volumes of data, NSPs have
invested significant resources to upgrade central office switching centers and
the interconnecting infrastructure, known as the network backbone. While
capacity constraints in the network backbone continue to be addressed through
the use of high speed digital and fiber-optic equipment, the network that
connects end users to NSP central offices, typically known as the "last mile,"
remains a bottleneck that limits high-speed data transmission. The last mile
was originally constructed with copper twisted-pair wiring designed to support
analog voice traffic. There is an installed base of over 170 million copper
lines in the United States, and over 780 million worldwide. End users have been
frustrated by these limitations and the ability of NSPs to cost effectively
deliver high-speed services, such as telecommuting, branch office
internetworking and Internet access, over the last mile. Standard, narrowband
dial-up connections, which are typically limited to data transmission rates of
28.8 kilobits per second, or Kbps, to 56.0 Kbps do not adequately support these
applications. We believe that most business and residential users are finding
these types of narrowband access technologies unacceptable for their high
bandwidth requirements.
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Global regulatory changes are increasing the number of competitors in
the access portion of the network and are further accelerating the need for
NSPs to upgrade their networks and increase their service offerings.
Internationally, a number of developed and developing nations have privatized
their state-owned telecommunications monopolies and opened their markets to new
NSPs. Competitors that have emerged and potentially could take customers from
incumbent carriers include competitive local exchange carriers, often called
CLECs, Internet service providers, satellite operators, cable operators and
electric utilities. For example, cable operators are already beginning to
provide data transmission services to customers by leveraging the high
bandwidth capabilities of their coaxial cable based infrastructure. This
increase in competition for the access portion of the network is also helping
to facilitate the transition from narrowband to broadband access over the last
mile.
New digital technologies have been introduced to increase the speed
and quality of digital transmission over the copper wire infrastructure, or
local loop, in the last mile and provide alternative means of accessing the
network backbone. The increased speed, lower transmission cost, higher
reliability and quality of digital networks are better suited for transmitting
the increased level of enhanced voice and high-speed data traffic that now must
pass over the last mile. Recently, NSPs have begun to install higher-speed,
digital broadband transmission technologies, such as DSL, in the last mile.
Recent forecasts by U.S. Bancorp Piper Jaffray Equity Research predict that the
market for DSL equipment in the U.S. alone will grow from $600 million in 1999
to over $4 billion by 2002.
NSPs have deployed various narrowband and broadband technologies
across customers' wide area networks in order to provide cost-effective access
solutions for their customers. Demand for high-speed access services has
increased and more protocols have emerged to facilitate the connections of
business customers to NSPs' network backbones. Protocols are computer languages
that allow two or more communications devices, such as modems, to communicate
with one another. These protocols include Frame Relay, asynchronous transfer
mode, commonly referred to as ATM, integrated services digital network,
commonly referred to as ISDN, DSL and others. When networks must support
multiple protocols, network management is more difficult because many protocols
are being used simultaneously and the network management devices must decipher
each protocol. The proliferation of protocols makes the provisioning and
management of high-speed access technologies and services increasingly
difficult. As a result, NSPs are required to operate and maintain hybrid
networks comprised of recently adopted new technologies and existing installed
equipment.
The performance, quality and maintainability of network services are
highly dependent on the volume and type of traffic running over these hybrid
networks. As a result, NSPs and business customers need sophisticated
diagnostic and management capabilities to monitor business customer application
traffic. The required tools should analyze the physical transmission
characteristics as well as enable NSPs and business customers to evaluate
compliance with service level agreement parameters such as, how much data gets
through the network, the time it takes data to get through the network and
availability of the network. Business customers also need management solutions
that can be scaled to meet growing demand for services, improve network
quality, reduce the number of support personnel managing their networks and
lower the overall costs for bandwidth and maintenance tools.
As demand for high-speed transmission continues to increase, we
believe that the telecommunications industry will continue to develop and
deploy new broadband access technologies, which will become increasingly cost
competitive with traditional technologies. As a result of changes in the
telecommunications industry, NSPs are requiring flexible solutions that can be
scaled to meet growing demand for services, and also permit easy,
cost-effective enhancements in the future. With the increasing number of access
protocols and equipment options, customers are placing a higher level of
importance on the ability of equipment providers to deliver integrated system
solutions.
THE PARADYNE SOLUTION
Paradyne is a leading developer, manufacturer and distributor of
network access products for NSPs and business customers. We offer solutions
that enable business class, service level managed, high-speed connectivity over
the existing telephone network infrastructure and provide for cost-effective
access speeds of up to 45 Mbps. NSPs use our broadband products to enable
high-speed managed connections from the central office to the customer premise.
Moreover, our broadband products enable NSPs to more efficiently provide
network access services by
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allowing a high level of management, monitoring and control over network access
equipment and circuits. Business customers use our broadband products for
high-speed connection of voice and data communications to connect their
employees to corporate wide area networks and to the Internet using both public
and private services provided by NSPs. Our products are designed for easy
installation by NSPs and end users, significantly reducing the need for
installation by an onsite service technician, thereby reducing costs for
network access.
BROADBAND SOLUTIONS
- Broadband DSL Access. Our Hotwire solution delivers broadband
DSL access across the existing copper wire infrastructure. The
Hotwire products enable competitive local exchange carriers,
incumbent carriers and other NSPs to provide broadband access
to business customers, teleworkers and residential customers
at substantially reduced rates compared to conventional
service offerings. We believe our Hotwire solution allows NSPs
the ability to deploy the broadest array of DSL technologies
of any commercially available product in a single platform.
This enables NSPs to match the appropriate DSL technology to
the customer's application requirements and thereby serve a
wider array of customers. This also allows for a more
efficient utilization of expensive central office equipment
space and minimizes operational support requirements, such as
training and inventory, by using a single vendor.
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- Broadband SLM. The FrameSaver solution enables competitive
local exchange carriers, incumbent carriers and other Frame
Relay service providers to offer managed high-speed service
from end-to-end across their networks and across multi-carrier
networks. Using packet technology, Frame Relay and
asynchronous transfer mode networks allow for the economical
use of the broadband network backbone. Packet technology
allows data from many customers to share the same network.
Each customer's data is put into packets, or envelopes, that
contain only their data and have an identification stamp that
designates the customer. These packets, or envelopes, are then
sent over a broadband network along with other customer's
packets. These packets are able to simultaneously share the
broadband network. However, without the use of an SLM
solution, the NSP and the business customer are unable to
proactively manage and guarantee the level of service across
the network. The FrameSaver solution allows customers the
ability to graphically view real time and historical network
performance statistics and troubleshoot failures end-to-end
across the Frame Relay network from our OpenLane network
management system.
- Broadband Conventional Access. Our Acculink and NextEdge
solutions deliver broadband access across the existing NSP
infrastructure utilizing T1/E1 links. A T1/E1 link is a
connection between two locations that carries data at the rate
of 1.544 megabits per second (T1) or 2.048 megabits per second
(E1). The T1/E1 infrastructure is the most commonly deployed
broadband network system today and is widely available in the
United States. Customers often have both voice and data
networks that were installed using multiple broadband and/or
narrowband access lines. A single conventional broadband
facility can typically accommodate up to 24 narrowband lines.
Acculink and NextEdge act as the required communications
interface to these broadband networks and enable the
elimination of narrowband access lines by consolidating voice
and data over the same broadband circuit. Access consolidation
reduces the cost of high-speed access and may also increase
performance, particularly when customers consolidate multiple
narrowband access lines onto broadband facilities.
Additionally, NextEdge incorporates FrameSaver SLM functions
to deliver access consolidation and SLM in the same platform.
Acculink and NextEdge solutions are used by competitive local
exchange carriers, incumbent carriers and other NSPs to offer
service level managed, high-speed access to public and private
networks. Business customers choosing to manage their own
networks also deploy our Acculink and NextEdge solutions.
NARROWBAND SOLUTIONS
- Subrate Digital Access and Analog Modems. Our Comsphere
digital access products provide an interface between a
customer's digital equipment and an NSP's digital circuit
operating at speeds of up to 64 Kbps. Our Comsphere modems
enable analog communications over dial-up or dedicated
circuits. These products enable NSPs and business customers to
build low-cost, centrally managed networks. Introduced in the
early 1990s, these products are widely deployed in NSP
networks and business networks around the world.
- Acculink Access Controller. We resell the Acculink Access
Controller, our private label for the IMACS system of Zhone
Corporation. Paradyne and Premisys entered into a distribution
agreement in 1992, which has been amended and extended, under
which we have exclusive distribution rights through April 2005
for Premisys' IMACS system, which we market to Lucent and
AT&T. Zhone Corporation acquired Premisys in 1999. In 1995 and
1996, we sold the Acculink Access Controller to Lucent, AT&T
and many other companies. In 1997, we discontinued selling the
product to customers other than Lucent and AT&T for various
pricing and distribution reasons. Currently, we sell the
Acculink Access Controller to Lucent and AT&T for a variety of
wireless and wireline applications. We have also developed and
sell a limited number of hardware and software enhancements
for the Acculink Access Controller.
STRATEGY
Our objective is to maintain and build upon our position as one of the
leaders in the broadband access market utilizing next generation DSL solutions,
conventional copper broadband solutions and SLM solutions. Key elements of our
strategy include:
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CONTINUE TO DEVELOP INNOVATIVE BROADBAND TECHNOLOGY AND SYSTEM SOLUTIONS
We will continue to focus on providing innovative, cost-effective
broadband access solutions that improve communications over the traditional
copper telephone wire infrastructure for NSPs and business customers. We believe
that our internally developed technologies play a key role in differentiating
our products from those of our competitors. We have been issued over 200 U. S.
patents, hold over 165 and have over 100 U. S. patent applications pending, and
we expect many of these patents and patent applications will contribute to the
development of new technologies and systems. In addition, we will continue to
collaborate with technology partners to facilitate the development of
competitive products, as we have previously done with NetScout, Lucent and
others. Our DSL technological innovations include our Multiple Virtual Line
(MVL) technology, which has been implemented in our Hotwire products. Our SLM
technology innovations have been implemented in our FrameSaver, NextEdge and
OpenLane products. We intend to enhance our Hotwire DSL solutions with higher
port densities, additional customer premises equipment capabilities and
additional features for our DSL access multiplexer, commonly referred to DSLAM.
Higher port densities will allow more modems to be deployed in one DSLAM which
lowers the cost of deploying a modem. The cost is lowered because more modems
can share the common cost of the DSLAM chassis and power supplies and because
customers can put more modems in the same amount of shelf space. In order to
increase customer premises equipment capabilities, we intend to build products
that allow customers to perform many functions over their DSL network. These
products could allow voice and data to share the DSL network, SLM to be deployed
over a DSL network, streaming audio and video over a DSL network, or special
protocols to be transmitted over a DSL network. In order to create additional
features for our DSLAM we plan to continue to develop new versions of both
hardware and software to support new requirements from our customers. Further,
we intend to integrate our FrameSaver SLM technology into additional platforms,
including those that support DSL and asynchronous transfer mode. As our
customers continue to expand their DSL networks into the application space of
conventional broadband networks, we believe our technological leadership and
products provide Paradyne a competitive advantage.
CONTINUE TO CAPITALIZE ON BUILDOUT OF DSL INFRASTRUCTURE
Revenues from U.S. sales of DSL equipment are projected by industry
sources to increase from $600 million in 1999 to more than $4 billion by 2002.
To capitalize on this projected growth, we intend to continue to pursue "design
wins" from NSPs that are offering or plan to offer DSL services. A "design win"
is achieved when an NSP adopts Paradyne products as one of a limited number of
DSL platforms for its central office. A typical NSP buildout includes DSLAMs in
an NSP's central office, resulting in an installed base into which Paradyne
will be well positioned to sell DSL line-cards for the DSLAMs and DSL customer
premises equipment for the end user. Since the third quarter of 1997, Paradyne
has shipped over 4900 DSLAMs with a capacity of 1.3 million lines. Some of our
current DSL customers include CFW Communications, Guangdong PTA, HarvardNet,
NAS CuNet, Rhythms, TDS Telecom, and Choice One. We will continue to focus on
increasing our number of design wins with new NSPs as well as maintain our
existing relationships with NSPs who have awarded us design wins in the past.
We also intend to continue to produce a variety of DSL line-cards and DSL
customer premises equipment to handle the diverse needs of our NSP customers.
We intend to install DSL interfaces on our FrameSaver and NextEdge products
which will allow customers to deploy those solutions into DSL networks. We
further plan to enhance our DSLAMs so that they may be interoperable with other
companies' technologies and DSL customer premises equipment in order to provide
a more comprehensive DSL solution.
INCREASE WORLDWIDE DEPLOYMENT OF FRAMESAVER AS PART OF NSP/ SLM SOLUTIONS
NSPs are enhancing their service offerings by providing service level
agreements for their Frame Relay and asynchronous transfer mode business
customers. Service level agreements are put in place between an NSP and the
NSP's customer to document how the NSP and the customer expect the service to
operate. If the service does not operate as specified, then there is typically
some type of remedy. An example might be that the service is supposed to be
available 24 hours a day, 365 days a year. If the service is not available for
one of those days, then the NSP might be required to reimburse the customer for
one day's worth of charges. We believe that as service level agreements become
more widely adopted, NSPs and end user customers will increasingly require SLM
solutions and, therefore, that NSPs will be required to incorporate these
solutions in their networks. We intend to focus on further integrating
FrameSaver as part of our existing NSP customers' service level agreement
solutions and
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obtaining additional FrameSaver design wins from new NSPs.
Currently, Ameritech, Intermedia, BroadWing (formerly IXC), MCI WorldCom, GTE
and Sprint offer FrameSaver solutions to their customers. In addition, we
intend to work with other Frame Relay and ATM equipment vendors to leverage our
FrameSaver products.
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FOCUS ON PRODUCT SALES TO AND THROUGH NSPs
We intend to continue focusing on NSPs that provide managed network
access services to capitalize on the increased demand for such services. Over
the past three years, our sales to NSPs have increased as a result of the
efforts of our worldwide NSP direct sales force. We estimate that over 65% of
our revenues in 1999 were generated from sales to NSPs. We intend to focus the
efforts of our direct sales force on maintaining and increasing sales within
our current NSP customer base as well as attracting new NSPs. We plan on
focusing primarily on NSPs deploying DSL and Frame Relay voice and data
services.
LEVERAGE FORTUNE 500 CUSTOMER BASE AS THEY UPGRADE THEIR NETWORKS TO BROADBAND
We intend to leverage our installed base of Fortune 500 companies and
other businesses that have purchased our narrowband products and conventional
broadband products. Many of these customers have deployed networks including a
combination of our narrowband and broadband solutions, and we expect that over
the next few years many of these companies will upgrade their networks with
additional broadband solutions. We believe that our existing customers prefer
to buy broadband products from Paradyne as a result of the ability to integrate
Paradyne products into their existing networks more efficiently than the
products of our competitors. In order to capitalize on this potential equipment
upgrade within Fortune 500 companies, we intend to continue to provide
cost-effective solutions for our current customers while increasing our sales
effort with our Fortune 500 customer base.
PRODUCTS AND TECHNOLOGIES
We develop, manufacture and distribute an extensive line of broadband
network access products and technologies. Sales of broadband products
represented approximately 70% of our total product sales in 1999. In addition,
we provide advanced network management systems that allow business customers
and NSPs to have a high level of management, monitoring and control over their
network access equipment and circuits. Although advanced network management
systems are an important aspect of our products and technology, they have not
been a material aspect of our sales revenue generation. The table below
includes a summary of our principal products. A further description of such
products follows the table.
<TABLE>
<CAPTION>
PARADYNE PRODUCT PORTFOLIO
PRODUCT DESCRIPTION APPLICATION
BROADBAND SOLUTIONS
<S> <C> <C>
Hotwire DSLAM A chassis that houses different line Typically resides inside a network
cards supporting a variety of DSL service provider's central office
technologies and terminates many DSL lines
and aggregates them into a high-
speed connection to a network
backbone.
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
Hotwire RADSL Consists of: The card in the DSLAM and the
- A line card that fits inside the endpoint create a high speed
DSLAM, and packet connection operating at
supports asymmetric digital transmission rates up to 7
subscriber line, or ADSL, and megabits per second over a two
symmetric digital subscriber wire telephone line. Also allows
line, or SDSL, technologies that voice to be transmitted at the same
operate at the highest possible time data is being transmitted.
speed based on the quality of
the telephone line; and
- A standalone endpoint that
connects the user to the
telephone line.
Hotwire MSDSL Consists of: The card in the DSLAM and the
- A line card that fits inside the endpoint create a high speed
DSLAM, and supports symmetric channelized connection
digital subscriber line, or SDSL, operating at transmission
technology that operates at the rates up to 2 megabits per second
highest possible speed based on over a two wire telephone line.
the quality of the telephone line; and Also allows voice to be transmitted
at the same time data is being
- A standalone endpoint that transmitted.
connects the user to the
telephone line.
Superline - A standalone endpoint that allows The endpoint allows up to three
three telephone lines and one distinct telephones, each with a
Ethernet port to share a single different telephone number, to
line. share the single telephone line
into a business or residence.
In addition, there is an Ethernet
port that also allows up to 640
kilobits per second of data to
share the telephone line.
Hotwire SDSL/IDSL Consists of: The card in the DSLAM and the
- A high density 24 port endpoint create a high speed
line card that fits inside the connection operating at
DSLAM and supports symmetric transmission rates up to 2
digital subscriber line, or SDSL/IDSL, megabits per second over a two
</TABLE>
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<TABLE>
<CAPTION>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
technology that operates at the wire telephone line. Also allows
highest possible speed based on operation through a Digital Loop
the quality of the telephone line; and Carrier (DLC) for service areas that
- A standalone endpoint that are fed by high speed fiber connections
connects the user to the
telephone line.
Hotwire MHDSL Consists of: The card in the DSLAM and the
- A line card that fits inside the endpoint create a high speed
DSLAM and supports high bit connection operating at
rate digital subscriber line, or transmission rates up to 2
HDSL; megabits per second over a four
- Technology that operates at the wire telephone line. Also allows
highest possible speed based on voice to be transmitted at the same
the quality of the telephone line; time data is being transmitted.
and
- A standalone endpoint that
connects the user to the
telephone line.
Hotwire MVL (Multiple Consists of: The card in the DSLAM and the
Virtual Lines) - A line card that fits inside the endpoint create a high speed
DSLAM and supports MVL packet connection operating at
technology that operates at the transmission rates up to 768
highest possible speed based on kilobits per second over a two
the quality of the telephone line; wire telephone line. Also allows
and voice to be transmitted at the same
- A standalone endpoint that time data is being transmitted.
connects the user to the
telephone line.
FrameSaver SLM Consists of: Many locations are connected to a
(Service Level Management) - A standalone endpoint that Frame Relay network and the
connects remote offices to a service level management software
frame relay network. Also is used to make sure each location
available as a line card; and is operating efficiently per the
- Service level management configuration of the Frame Relay
software for monitoring and service.
managing a Frame Relay
network.
</TABLE>
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<TABLE>
PRODUCT DESCRIPTION APPLICATION
<S> <C> <C>
FrameSaver Network A standalone endpoint that Allows two different Frame Relay
to Network connects two Frame Relay networks to be connected together
networks together. and support the service level
management software applications.
FrameSaver/ATM A standalone endpoint that Allows one high speed connection
connects large locations to a to a Frame Relay network that is
Frame Relay network through a 45 more efficient than many lower
megabits per second connection to speed connections.
an asynchronous transfer mode
network.
Acculink Broadband Standalone endpoints that transmit Allows voice and data traffic to
Digital Access data and voice over high-speed share a single, high-speed circuit
circuits. Also available as a line to a variety of backbone networks.
card.
NextEdge A standalone endpoint that Allows many different data and
supports many data and voice voice services at a remote office to
connections over several high- share one or two high speed
speed circuits. Also supports the circuits to a variety of backbone
FrameSaver service level networks. In addition, it can be
management system. integrated into a FrameSaver
service level management system.
NARROWBAND SOLUTIONS
Comsphere Subrate
Digital Access Standalone and line card products Allows data services to be connected
that support data transmission over digital leased lines at narrowband
over digital network facilities. speeds.
Comsphere Modems Standalone and line card products Dial-up and leased line modems
that support data transmission that allow narrowband connectivity
over analog network facilities. over analog lines
NETWORK MANAGEMENT SOLUTIONS
OpenLane Network Software for managing networks Used as a standalone system or
Management System built with Paradyne products. part of a larger system to manage
all the Paradyne products deployed
in a network.
</TABLE>
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BROADBAND SOLUTIONS
Broadband DSL
Hotwire. The Hotwire multiservices system includes DSLAM termination
equipment, which provides aggregation of services in the central office, and an
array of customer premises equipment, which extend various broadband access
services over the local loop to the customer premise. The system supports a
range of broadband multimedia access services, such as business and residential
Internet access, remote local area networks access and virtual private network
access at symmetric rates (similar transmission rate for sending and receiving
data over the same line) of up to 2 Mbps and asymmetric rates (varying
transmission rates for sending and receiving data over the same line) of up to
8 Mbps. Hotwire also supports Frame Relay, asynchronous transfer mode T1/E1
channelized access to the wide area networks. With channelized access,
customers can send and receive voice or data traffic on different channels. For
example, channels 1-12 could be used to send data while channels 13-24 could be
used to send voice. In addition to supporting high density configurations for
central office applications, the efficient packaging for lower density market
entry applications allows Hotwire products to be deployed in a variety of
private copper networks, including multi-dwelling-units for both business and
residential access services, universities, hotels, and government campus
private networks.
Our primary customers for Hotwire products are competitive local
exchange carriers, incumbent carriers and other NSPs. Their services are
typically focused on meeting the broadband networking requirements of business
customers, teleworkers and the small office/home office market often with an
emphasis on broadband Internet access. Competitive local exchange carriers
customers, such as Rhythms, are deploying a nationwide network using our
Hotwire systems. Incumbent carriers such as North Pittsburgh Telephone are
deploying Hotwire in their local service areas. NSPs outside the United States,
such as the Guangdong PTA in China, are using Hotwire products to deliver
broadband access to the provinces they serve. The principal focus of these
customers, particularly in the early stages, is to build out central office
installations. Our Hotwire products are easily installed, scaleable and operate
over long loops, which enhance an NSP's ability to deploy them quickly and
service new customers.
We believe that the ability to support multiple access services, with
a choice of symmetric or asymmetric DSL technologies, multiple backbone
capabilities and the ability to scale to over 1,000 DSL lines per system makes
Hotwire one of the most flexible and scalable DSL systems available. We believe
this is important because our NSP customers may want to supply symmetric
services to their business customers and asymmetric services to their consumer
customers. In addition, our NSP customers may want to use asynchronous transfer
mode on some backbone connections and Frame Relay on other backbone
connections. The Hotwire system can be configured, monitored and controlled
through our OpenLane network management system that provides complete
end-to-end management and reporting coverage of the entire broadband DSL access
solution.
Hotwire products consist of two major product family categories,
DSLAMs and customer premises equipment.
- Hotwire Multiservices DSLAMs: A DSLAM is a DSL access multiplexer
installed in NSPs' central offices and private copper networks that provides
termination and aggregation of multiple DSL lines and associated services
protocol translation. The Hotwire Multiservices DSLAM systems consist of
network equipment building standard certified chassis and associated DSL line
cards, and an aggregation system with a variety of wide area network options
and a standards based network management system. Network equipment building
standard certification is generally necessary in order for a product to be
installed in the central office of an NSP. Key features of a Hotwire DSLAM
system include:
- the ability to support line cards that support between four
and 24 ports per card;
- multiple DSLAM configurations, which include our
highly-compact, stackable DSLAM supporting as few as 4-8 DSL
lines which is scalable to 68 lines and our high-density DSLAM
supporting as many as 432 lines per shelf;
- the ability to support a range of voice and data applications
that operate over packet technologies and channelized access
technologies;
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- a broad set of available interfaces to consolidate traffic
onto a backbone network. These interfaces operate from between
1.544 Mbps up to 45 Mbps and can be configured to support
Ethernet, Frame Relay or asynchronous transfer mode. These
interfaces include: 10base-T, 100base-T, Channelized T1 and
E1, Frame Relay T1 and E1 and asynchronous transfer mode; and
- a simple network management protocol compliant distributed
network management architecture that supports efficient
network management required for large NSP network deployments.
In September of 1999, we announced our latest advancement in our DSLAM
product line, the Hotwire GranDSLAM. This new DSLAM, which began shipping in
November of 1999, incorporates the latest ATM switching technology and enhances
the ability of the Hotwire product to support high quality services. Services
such as Voice over DSL (VoDSL) require prioritization over other services such
as Internet access in order to work correctly. The ATM capabilities of the
GranDSLAM support VoDSL and also will be the platform with which we will deploy
solutions that are standards based and interoperable with endpoint equipment
from companies with whom we partner.
- Hotwire DSL customer premises equipment: Hotwire customer premises
equipment terminates DSL access services at the customer premise for
connectivity to local area networks, personal computers, routers and
other voice and data equipment. Hotwire customer premises equipment
operates at a variety of transmission speeds and loop lengths to meet
the needs of our customers. Hotwire customer premises equipment and
associated DSLAM line cards support multiple DSL technologies.
We expect to continue to implement these multiple DSL technologies in
our Hotwire products, and, consistent with market requirements, to implement
additional DSL technologies, such as G.lite. Additionally, Hotwire customer
premises equipment will be enhanced to include new features required by our
customers and the general market. While we purchase some of the DSL
technologies implemented in the Hotwire DSLAM and customer premises equipment,
our MVL product represents a new DSL technology developed and implemented by
Paradyne that does not require a telephone line splitter and works over very
long loops. The primary advantages of MVL technology are:
- simultaneous voice and data capability over copper loops
up to 24,000 feet and is not affected by multiple
terminations of copper loop, commonly known as bridged
taps, which provides for ease of customer installation
and eliminate rewiring at the customer premise; and
- operates using low power, which allows higher density
DSLAMs which lowers the cost for our NSP customers.
In March 1999, we received approval from the FCC to register Hotwire
MVL under Part 68 of the FCC's Rules for the Registration of Telephone
Equipment code. The FCC requires that all customer-installed equipment that
resides on the telephone infrastructure be registered under Part 68. This
approval is based on the FCC's decision that Hotwire MVL benefits the public's
interest by providing enhanced customer choice and improved service quality for
data transmission over the public switched telephone network and does not pose
a risk of harm to the public switched telephone network. We believe that the
approval should allow more customers to deploy MVL while meeting the network
requirements of incumbent carriers.
In an order on line sharing and spectrum unbundling, (FCC 99-355)
released Dec. 9, 1999, the FCC officially named Paradyne's Hotwire MVL
technology compatible for line sharing. The new regulations are widely expected
to speed the deployment of DSL because they require local telephone companies
to share their existing phone lines with competitors who provide DSL services.
The FCC has ruled that the same lines can simultaneously transmit voice and
high-speed data from different providers. The Hotwire MVL product is well
suited for line sharing applications because of its ability to operate over
voice lines and on almost any loop. Line sharing will reduce the recurring
monthly costs for copper lines and effectively make it the same cost for
competitive local exchange carriers and incumbent carriers. This cost sharing
will open opportunities in the residential market to
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competitive local exchange carriers and incumbent carriers. We believe Hotwire
MVL provides a competitive advantage for competitive local exchange carriers and
incumbent carriers in this application.
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BROADBAND SERVICE LEVEL MANAGEMENT
FrameSaver. Our FrameSaver system is an innovative SLM system for
Frame Relay and Frame Relay/asynchronous transfer mode networks. The
FrameSaver system consists of customer premises equipment, NSP equipment and
network management software to monitor and measure network performance across
public Frame Relay systems. The FrameSaver system measures performance and
stores the results for retrieval by our OpenLane network management system. The
storage and data retrieval mechanisms have been implemented according to
recognized industry standards, which makes the FrameSaver system compatible and
interoperable with many other systems that business customers or NSPs may have
installed. The FrameSaver network access units also provide extensive
non-disruptive diagnostic and testing capabilities along with standard access
functionality, to give enterprise customers or service providers a complete
managed solution. The remote monitoring technology included in the FrameSaver
System, called RMON-2, was developed by NetScout and is included in the
FrameSaver system pursuant to a collaboration between Paradyne and NetScout.
The significance of utilizing RMON-2 is that it is a communications language
that has been standardized. Therefore, many different companies build products
that utilize RMON-2 which enables communication with the FrameSaver system.
Key features of our FrameSaver system include:
- extensive performance management with diagnostic and control
capabilities that are used to identify and resolve problems
quickly without disrupting the network;
- standards based measurements that allow customers to measure
data throughput both within and above their committed
information rates;
- availability in a range of network access speeds, from 64 Kbps
up to T3;
- non disruptive management that can be accessed over the Frame
Relay network or through an integrated dial modem;
- the ability to install and diagnose without the presence of a
router;
- dial backup through integrated service digital network to
protect against network failures;
- network to network interface for SLM across multiple Frame
Relay networks;
- auto configuration of customer premises equipment for ease of
installation; and
- the ability to scale from small single customer networks to
very large service provider networks.
FrameSaver allows companies to build and manage data networks based on
public network services, while maintaining the same operational efficiency and
confidence used in the management of private networks. By deploying FrameSaver,
business customers can move applications from costly leased lines to shared
public networks and benefit from reduced network services costs, while
maintaining a high degree of control of the network. The FrameSaver system
enables NSPs and business customers to accurately monitor the performance of
individual customer connections across a public or private Frame Relay or Frame
Relay/asynchronous transfer mode network and to report details of that
performance at varying time intervals.
While competing products may offer some of the features of the
FrameSaver product, we believe that no other product on the market today offers
such a wide variety of features. With our FrameSaver solution's ability to
operate completely independent of a router, NSPs are able to manage the network
end-to-end without relying on the customer's router. Router independence is a
key differentiating feature because during installation of the circuit, the
router might not be installed and when diagnosing an operational circuit, it
may be the router that is actually causing the problem. FrameSaver offers NSPs
the ability to perform non-disruptive circuit loopback testing from their
network operations center. This FrameSaver feature allows an NSP to respond to
a trouble call within a few minutes instead of hours, saving time and personnel
expense while increasing customer satisfaction. For these reasons,
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management believes that due to its comprehensive feature set, FrameSaver
offers NSPs and business customers cost savings not found in competing
solutions.
FrameSaver FLEX is the latest addition to our FrameSaver product
family and is scheduled to begin shipping in April of 2000. FrameSaver FLEX is
a SLM product that can be deployed in a basic and less expensive configuration
for the purpose of delivering a subset of the FrameSaver features. This product
targets those customers that want a subset of the Frame Relay diagnostic
features and who may eventually wish to deploy a complete SLM solution.
FrameSaver FLEX is easily installed and is upgradeable through software to the
full set of SLM features. This product is then directed at NSPs that wish to
analyze all of their Frame Relay customer lines to enable quick and easy
problem resolution from their network operation centers. We believe this
product will enhance our ability to win new NSP business for our FrameSaver
solutions.
BROADBAND CONVENTIONAL ACCESS
Acculink and NextEdge T1/E1 digital access products consist of a
range of products that provide an interface between a T1 circuit, which carries
data at 1.544 Mbps or E1 circuit, which carries data at 2.048 Mbps, and a
customer's high-speed digital equipment, such as a computer, router,
multiplexer, wide area network switch or telephone system. The Acculink and
NextEdge products are managed by our OpenLane network management system, which
provides centralized management of large, geographically dispersed networks for
NSPs and businesses. Businesses, service providers, government entities and
other organizations use these products to build low-cost, centrally managed
networks for high-speed, digital applications. Our T1/E1 digital access
products provide a broad range of features, including centralized,
standards-based network management multiple voice and data interface ports and
multiplexing.
Acculink. Acculink products provide integrated voice and data network
access to business customers who want to take full advantage of their T1/E1
bandwidth capacity. The products are used primarily in applications where voice
and data integration over a T1 or E1 line is required. The Acculink T1/E1
products were introduced as a standard part of AT& T's High-Speed Accunet
digital services in the early 1990s, and have been deployed widely in large
business networks ever since.
NextEdge. The NextEdge products add the SLM capabilities of FrameSaver
to the functionality provided by the Acculink products. NextEdge products are
used by NSPs and business customers to deploy integrated voice and data
services plus managed Frame Relay services over a common T1 infrastructure.
Business customers are seeking to maintain the SLM capabilities they have come
to view as essential for their public Frame Relay services as they integrate
other network services onto available bandwidth in their T1 access lines.
NARROWBAND SOLUTIONS
Our comsphere digital access products consist of a family of managed
digital service units that provide a network interface for a digital circuit
operating at up to 64 Kbps and a customer's digital equipment, such as a
computer, terminal controller, router or other narrowband digital
communications equipment. We introduced the Comsphere digital service unit in
the early 1990s, when they were offered as a standard part of AT&T's digital
data services. Our Comsphere analog modems enable communications over dial-up
or dedicated analog circuits. These analog modems are approved for use around
the world and are widely deployed in business and NSP networks. These highly
managed modems operate on both dial circuits and analog private line circuits
where network applications demand an extremely high degree of network uptime
and manageability. All of the Comsphere products are managed by our OpenLane
network management system, which provides centralized management of large,
geographically dispersed networks for NSPs and businesses.
Businesses, service providers, government entities and other
organizations use these products to build low-cost, centrally managed networks
for their digital applications. Many of these customers have also begun
installing our Acculink, NextEdge and FrameSaver products for their broadband
network access applications. We estimate that we have shipped more than 775,000
narrowband access products over the past five years.
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NETWORK MANAGEMENT SOLUTIONS
OpenLane. The OpenLane network management system, a centralized
management platform, integrates OpenLane into all of our product families and
provides NSPs and business customers with the ability to manage their network
access products located at the edge of the wide area network. The OpenLane
software is purchased separately with each of our products in order to utilize
OpenLane's management capabilities. OpenLane consists of a suite of network
management tools that provide SLM and visibility into network circuits and
network access unit performance. The management tools work together to provide
business customers and NSPs with detailed, accurate performance metrics needed
to understand precisely how their network is performing and where performance
problems or potential problems may reside. The OpenLane network management
system offers a user-friendly graphical user interface and graphical reporting.
OpenLane is designed to work with Hewlett-Packard's OpenView network management
platform and is based extensively on standards, such as simple network
management protocol, which enable it to interface with many third-party network
management applications that our business and NSP customers may be using.
OpenLane can provide reports and access to screens either directly or by using
the Internet for web-based delivery. Recent releases of our OpenLane software
modules are based on Java programming to permit a platform independent system.
Our NSP and business customers depend on the OpenLane network management system
as the central management system they use to monitor and control the network
access products that they have deployed in their networks.
CORPORATE DEVELOPMENT RELATIONSHIPS
Our success is dependent upon our continued development relationships
with a number of companies with whom we have development arrangements. We
expect to continue to collaborate with technology partners to facilitate the
development of competitive products. Currently, our development relationships
include the following:
NetScout. In January 1998, we entered into a marketing and license
agreement with NetScout under which Paradyne agreed to utilize exclusively
NetScout's RMON-2 network management software with our FrameSaver Frame Relay
access unit products, to market and sell NetScout Manager Plus software with
our FrameSaver system and not to compete against NetScout with respect to
RMON-2 based technology. NetScout agreed to reference Paradyne as a strategic
partner for digital service units, DSLs and multiplexers and agreed to give
preference to Paradyne when sourcing or integrating digital service units.
NetScout granted a non-exclusive license to promote, market, sell, license and
distribute any NetScout software or product embedded into Paradyne's FrameSaver
products in exchange for royalty fees to NetScout. The agreement will expire in
January 2003, unless renewed.
Alcatel. Effective March 1999, we entered into a joint development and
supply arrangement with Xylan under which Xylan granted us a non-exclusive,
worldwide right to market, distribute and sell its OmniSwitch product and
related products with our DSL products. Alcatel acquired Xylan in 1999. The
agreement further provides that through at least March 2001, we are Xylan's
primary reseller of these products for connections to our DSLAMs. Paradyne and
Xylan have agreed upon feature enhancements to these products to meet specific
customer requirements. The agreement continues for two years, after which it
may be automatically renewed for successive one-year periods.
Lucent. In November 1998, we entered into a joint development and
marketing agreement with Ascend in connection with our OpenLane SLM software
and Ascend's Navis, a network management system. Lucent acquired Ascend in
1999. Under the agreement, we agreed to develop interface software which
integrates OpenLane with Navis, creating a single integrated solution for
competitive local exchange carriers, incumbent carriers and other NSPs. Ascend
and Paradyne jointly market Navis, together with OpenLane SLM software, to
NSPs. The agreement will continue unless terminated upon 60 days written
notice. In December of 1999 we entered into a 3 year agreement with Lucent to
private label a select group of our broadband access products including our
FrameSaver family of service level management products. Under the terms of the
agreement, the products will carry the Lucent logo and the Paradyne product
brand name. We believe this new agreement will strengthen support for sales of
these products within the Lucent sales organizations.
GlobeSpan. Effective March 1999, we entered into a supply agreement
with GlobeSpan which provides for preferential pricing to Paradyne and other
terms in connection with the purchase of GlobeSpan products by Paradyne. Under
the terms of this agreement, GlobeSpan is required to honor Paradyne's orders
for GlobeSpan products in quantities at least consistent with Paradyne's past
ordering practices and agreed to afford Paradyne at
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least the same priority for its orders as GlobeSpan affords other similarly
situated customers. Paradyne was also granted immunity under GlobeSpan's
intellectual property rights for all Paradyne customers that purchase Paradyne
products that incorporate GlobeSpan products. GlobeSpan has been selling
products to Paradyne pursuant to these terms since July 1998. The agreement will
expire in March 2003, unless terminated upon one year's notice. In addition to
the supply agreement, Paradyne and GlobeSpan work very closely together to
develop capabilities that are jointly defined by the two companies. Our
marketing and research and development organizations meet on a regular basis to
review the status of projects.
SALES, MARKETING AND DISTRIBUTION
We sell our products worldwide through a multi-tier distribution
system that includes direct sales, strategic partner sales, NSP sales and
traditional distributor or value added reseller sales. Our sales teams are
supported with marketing programs, educational programs, field technical
support and telephone technical support. Our Internet and intranet sites are
used extensively to communicate with our sales teams, our customers and our
resellers.
Our direct sales teams are organized to sell directly to NSP, value
added reseller and distributor customers. Our NSP and value added reseller
customers purchase our products and then sell them or provide them in a service
offering to business customers. We support our resellers' sales activity with a
demand generation sales force. This team markets to business customers in
support of our value added reseller and NSP partners. Our resellers add value
by providing order processing, credit and significant sales and technical
support. Our field sales teams are comprised of sales and systems engineering
personnel that are experienced and knowledgeable about the products and
technologies we provide and support. Our field sales teams are further
supported by Paradyne's telesales team. This inside sales team answers all
incoming emails and telephone calls, makes outbound telephone calls, follows up
on leads generated through advertising and provides telephone support to our
resellers.
Our resellers are responsible for identifying potential business
customers, selling our products as part of complete solutions and, in some
cases, customizing and integrating our products at end users' sites. We
establish relationships with resellers through written agreements that provide
prices, discounts and other material terms and conditions under which the
distributor is eligible to purchase our products for resale. Such agreements
generally do not grant exclusivity to the resellers, prevent the resellers from
carrying competing product lines or require the resellers to sell any
particular dollar amount of our products, although the contracts may be
terminated at our election if specified sales targets and end user satisfaction
goals are not attained. We nurture these relationships with resellers with
incentive and training programs. This multi-channel sales strategy encourages
broad market coverage by allowing our sales personnel to create demand for our
products while giving customers the flexibility to choose the most appropriate
delivery channels.
We participate in trade shows and seminars and make extensive use of
the Internet and our web presence at www. paradyne. com to promote and generate
demand for our products. (The reference to our worldwide web address does not
constitute incorporation by reference into this Form 10-K of the information
contained at this web site.) Since most of our customers utilize the Internet,
we believe that our Internet presence is a low cost and highly effective method
for educating our customers about our products and creating demand for our
products. As a result, we place Internet advertising and conduct targeted email
marketing. Our web site includes product information, multimedia presentations
and customer testimonials. We also host Internet based interactive seminars for
promotional seminars, training events and press conferences.
Channel marketing programs allow us to attract and support our
resellers, including NSPs. Our " Connect to Success" reseller program markets
and sells products directly to large resellers and through national
distributors, such as Ingram Micro and Tech Data, to hundreds of value added
resellers and NSPs. Our relationships with these distributors provide
significant value to our reseller partners by giving them immediate
availability to product without the cost of stocking. These well known
distributors also extend credit to resellers, increasing their buying
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power, and providing them with direct shipments to end customers further
reducing costs. Our reseller programs provide advertising support, volume
incentive rebates, exclusive access to technical support via 800 numbers and
through our web site. Special programs encourage value added reseller loyalty,
focus on strategic products, and focus on winning new accounts. Specialized
product training programs are provided to our resellers at our headquarters, in
the field and over the web.
In addition to the marketing and sale of our products, we resell the
Acculink Access Controller, our private label for the IMACS system of Premisys
Corporation, through a small focused sales team. Paradyne and Premisys entered
into a distribution agreement in 1992, which has been amended and extended,
under which we have exclusive distribution rights through April 2005 for
Premisys' IMACS system, which we market to Lucent and AT&T. In 1995 and 1996,
we sold the Acculink Access Controller to Lucent, AT&T and many other
companies. In 1997, we discontinued selling the product to customers other than
Lucent and AT&T for various pricing and distribution reasons. Currently, we
sell the Acculink Access Controller to Lucent and AT&T for a variety of
wireless and wireline applications. We have also developed and sell a limited
number of hardware and software enhancements for the Acculink Access
Controller.
CUSTOMERS
The end-users of our equipment are primarily businesses and NSPs.
BUSINESS CUSTOMERS
Business customers include businesses around the world that purchase
equipment for their company's wide area network from Paradyne's resellers or,
for some international customers, directly from Paradyne. Set forth below is a
representative list of businesses who purchased over $100,000 of our products
in 1999:
Bank One JC Penney New York University
Chase Manhattan Johnson Controls Owens Illinois
Cigna KN Energy Paine Webber
Citigroup Liberty Mutual PNC Bank
CSX Litton Salomon Smith Barney
Farmers Insurance Lucent Sony
Fifth Third Bank Marriott The Associates
First Union Mellon Bank Texas Instruments
General Electric Merrill Lynch VISA
Hertz NationsBank Whirlpool
Honeywell Nationwide Insurance Xerox
NETWORK SERVICE PROVIDERS
NSPs purchase equipment for their network or for resale into their
customers' networks. Set forth below is a representative list of NSPs who
purchased over $100,000 of our products in 1999:
AT&T Choice One MCI Worldcom
Ameritech Concord Telephone MT&T
Bell Atlantic Fujitsu North Pittsburgh Telephone
Bell Canada GTE North State Telephone
Bell South HarvardNet Quebec Telephone
Broadwing, Inc. Hydro Quebec Rhythms
Cable & Wireless Panama IBM Global Network SITA
Cadvision Integra Telecom Sprint
Cavalier Telephone Intermedia Communications TDS Telecom
CFW Communications Matanuska Telephone Telus Communications
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In the year ended December 31, 1999, two of our customers, Lucent and
Rhythms, accounted for greater than 10% of revenues. Direct sales to Lucent in
1999 accounted for approximately 26% of our total revenues. Sales to Tech Data
accounted for approximately 8% of our total revenues. We estimate that
approximately 58% of our sales to Tech Data represented products that were
resold to Lucent. Collectively, we estimate that direct and indirect sales to
Lucent accounted for approximately 30% of our total revenues in 1999. Lucent
purchases products to include in their data networking solutions products, which
it sells to businesses worldwide. Lucent also purchases our products to package
with their various telephone systems. Tech Data purchases products from us as a
distributor. Direct sales to Rhythms in 1999 represented approximately 25% of
our total revenues.
This Form 10-K includes trademarks, service marks and trade names of
other companies.
CUSTOMER SUPPORT
We maintain a strong focus on customer service and support for our
resellers and end user customers. We accomplish this at our customers' sites
through systems engineers who work with customers in a pre-sales role, and
through the support teams of our resellers. The Paradyne Technical Support
Center provides telephone based pre-and post-sales support to resellers and
customers on a seven day, 24 hour basis and also provides proposal support to
the sales organization. Our training organization provides technical training
to end users, maintenance service providers, NSPs and sales channels. Training
is included as a part of our channel programs or is provided on a fee basis.
We provide maintenance support offerings that utilize a variety of
service organizations based on geography and skills required. Our authorized
service providers include Lucent, NCR, Netera (formerly Myriad) and Equant
(formerly TechForce). These service providers provide service offerings that
include various maintenance packages, installation, remote management, project
management and other professional service options.
Warranties on most of our hardware products extend for 24 months. A
number of products carry a 12 month warranty and others carry a 60 month
warranty. Software products carry a 90 day warranty. Factory repair or
replacement is provided by us.
COMPETITION
The telecommunications market is highly competitive. If we fail to
compete effectively our business will be adversely affected. We believe that
competition may increase substantially as the introduction of new technologies,
deployment of broadband networks and potential regulatory changes create new
opportunities for established and emerging companies in the industry. We
compete directly with other providers of broadband and narrowband access
equipment, including ADC Telecommunications (including recently acquired
PairGain), Adtran, Alcatel, Cisco, Copper Mountain, Quick Eagle Networks
(formerly Digital Link), Larscom, Motorola, Nokia, Nortel Networks, Orckit,
Sync Research, 3Com, Tut Systems and Visual Networks. We expect that
competition for products that address the broadband access market will grow as
more companies and an increasing number of new companies focus on this market
to develop solutions for higher speed access to public networks. We expect that
competition for products that address the narrowband market will not
dramatically change over the course of the next few years.
Our future succcess will depend on our ability to compete successfully
against our competitors based on the following factors:
- key product features;
- system reliability and performance;
- technological innovation;
- price;
- time to market;
- breadth of product lines;
- conformity to industry standards;
- ease of installation and use;
- brand recognition;
- ability to help customers finance purchases;
- technical support and customer service; and
- size and stability of operations.
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RESEARCH AND DEVELOPMENT
Since 1969, we have been developing technologies and solutions for the
communications market. We believe that our future success is dependent on our
ability to continue to rapidly deliver innovative broadband access solutions.
Time to market is critical in order to meet the requirements of our extensive
customer base and to be able to quickly adapt to the constantly emerging needs
in the market. Innovation is critical in order to provide the capabilities that
differentiate the products and solutions that we offer from those of our
competitors. We intend to maintain an ongoing investment in research and
development that will support technological innovation.
Our research and development efforts are focused on sustaining and
enhancing our existing products and developing innovative new solutions in the
emerging broadband market. We emphasize early and frequent interaction between
our research and development systems engineers, key technologists and customers
to arrive at unique solutions to meet specific product requirements. Customer
feedback is also obtained from resellers and through participation in industry
events, organizations, and standards bodies.
We have developed core competencies in SLM, broadband systems
internetworking, network management, and broadband access technologies. We will
continue to rely on the use of industry and technology partnerships to further
enhance the capability to quickly introduce new solutions into the broadband
market, and we expect to continue to employ a strategy that uses a combination
of internally developed solutions and external partnering.
We maintain research and development sites in Largo, Florida and Red
Bank, New Jersey. In addition, engineering work is completed in Mexico and
India through technology partnering arrangements. In order to maintain our
rapid pace of product introduction, we will need to continue to attract
talented engineers and invest in state-of-the-art research and development
tools and processes. We will continue to invest resources in key skill areas,
such as Java programming, system software, digital signal processing,
internetworking, data communication protocols, test automation, central office
solutions, RISC processing, transmission technologies, and telephony.
Currently, we are developing enhancements for all of our broadband and
SLM product families. We expect this work to result in feature improvements to
these products, reduce our costs associated with their manufacture or reduce
the cost to deploy them. We are focused on increasing the density of our DSL
systems and recently introduced 12 and 24 line cards for our Hotwire DSLAM. We
are also adding additional line cards to our new Hotwire GranDSLAM and expect
to begin shipping our ADSL/G.lite card as well as our SDSL(2B1Q) card in the
first half of 2000. We are adding SLM to products that did not previously
include SLM capability, enhancing the SLM features for those products that
already support SLM and adding DSL function to products that currently have
only conventional broadband capabilities.
For a discussion of the amount spent on research and development for
the fiscal years ended December 31, 1997, 1998 and 1999, see "Item 7:
Management's Discussion and Analysis of Financial Condition and Results of
Operation -- Results of Operation" in this Form 10-K.
INTELLECTUAL PROPERTY
Our success and ability to compete is dependent in part upon our
proprietary technology. We rely on a combination of patent, copyright, trademark
and trade secret laws and non-disclosure agreements to protect our proprietary
technology. We have been issued over 200 patents, currently hold over 165 U. S.
patents and have over 110 U. S. patent applications pending. In addition, we
hold corresponding foreign patents and have corresponding foreign patent
applications pending. There can be no assurance that patents will be issued with
respect to pending or future patent applications or that our patents will be
upheld as valid or will prevent the development of competitive products.
We seek to protect our intellectual property rights by limiting access
to the distribution of our software, documentation and other proprietary
information. In addition, our employees execute proprietary information
agreements and we enter into nondisclosure agreements with some of our
strategic partners. There can be no assurance that the steps taken by us in
this regard will be adequate to prevent misappropriation of our technology or
that our competitors will not independently develop technologies that are
substantially equivalent or superior to our technologies. We also are subject
to the risk of adverse claims and litigation alleging infringement of the
intellectual property rights of others. In this regard, there can be no
assurance that third parties will not assert infringement claims in the future
with respect to our current or future products or that any such claims will not
require the us to
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enter into license arrangements or result in protracted and costly litigation,
regardless of the merits of such claims. Furthermore, from time to time, we
receive and have received letters from others requesting licenses or indicating
that our products may require a license. These letters are not uncommon in the
industry, and these letters are dealt with according to normal business
practices. For example, in March and July of 1999, we received letters from a
third party patent owner alleging infringement by us of patents allegedly
relating to equipment, including bar code scanners and circuit board
manufacturing equipment, which we use in our manufacturing processes, and to
integrated circuit microchips that we buy and incorporate into our products. We
purchase this equipment and the microchips from vendors, who we believe may have
an obligation to indemnify us in the event that the equipment and microchips
infringe the patents. The patents referenced in these letters are also the basis
for several infringement lawsuits commenced by the patent owner to which we are
not a party. In some of those claims, the defendants are in the process of
challenging the validity of the patents. No claim has been asserted beyond these
letters, but we cannot assure you that the third party will not commence an
infringement action against us. We are in the process of investigating the
allegations. If an infringement claim is brought against us, we cannot assure
you that we would prevail and any adverse outcome could require us, among other
things, to pay royalties to the third party patent owner. Based on our
investigation to date, we presently do not believe that any such adverse outcome
would have a material adverse impact on our operations. However, we cannot
assure you that future developments will not affect this conclusion or assure
you that we will not receive other letters alleging infringement in the future.
Most of Paradyne's existing patent portfolio, will be enforceable in
the United States for at least the next ten years, provided that periodic
maintenance fees are paid to the U. S. Patent & Trademark Office and unless
determined to be invalid or unenforceable by an appropriate court or the U. S.
Patent & Trademark Office. Most of Paradyne's inventions that are directed to
DSL and SLM technologies are covered in pending applications that have yet to
issue as patents and that have been filed in the last several years. If and
once issued, these patents will be enforceable for 20 years from the date the
application was originally filed, pursuant to applicable laws, provided that
periodic maintenance fees are paid to the U. S. Patent & Trademark Office and
unless determined to be invalid or unenforceable by an appropriate court or the
U. S. Patent & Trademark Office.
MANUFACTURING
We manufacture substantially all of our products. All of our major
operations are ISO-9001 registered. Many of our parts are procured from a
variety of qualified suppliers per our specification. Some of our strategic
suppliers are electronically linked, and given 26 week visibility of demand. We
believe that this is critical in maintaining high delivery volumes and
minimizing inventory. We use a combination of standard parts and components,
which are generally available from more than one vendor and some parts that are
obtained from a single source. We have generally been able to obtain adequate
supplies in a timely manner from our current vendors or, when necessary, to
meet production needs from alternative vendors. We believe that, in most cases,
alternate vendors can be identified if current vendors are unable to fulfill
our needs. However, if we are unable to obtain sufficient quantities of
necessary supplies, or if there is a significant increase in the price of key
components or materials, delays or reductions in manufacturing or product
shipments could occur, which would have a material adverse effect on our
business, financial condition and results of operations.
We believe that we have sufficient production capacity to meet current
demand for our product offerings and anticipate meeting future demand through a
combination of the use of additional employees and increased outsourcing of
products or components. In addition, we have the right of first refusal on the
construction of any building on some lands adjacent to our Largo, Florida
facilities if more space is needed to expand our manufacturing operations.
BACKLOG
Paradyne's firm backlog at the beginning of each quarter is a
fraction of the quarter's revenue target. Most revenue booked in each quarter
results from orders filled within the quarter. In most circumstances orders can
be rescheduled without penalty. Therefore, backlog is not a meaningful
indicator of future revenues.
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<PAGE> 24
EMPLOYEES
As of December 31, 1999, we employed approximately 856 full time
employees. None of our employees is covered by collective bargaining
agreements, and we believe that our relations with our employees are good.
GOVERNMENT REGULATION
From time to time, federal and state legislators propose legislation
that could affect our business, either beneficially or adversely, such as by
increasing competition or affecting the cost of our operations. Additionally,
the Federal Communications Commission ("FCC") and state regulatory bodies, may
adopt rules, regulations or policies that may affect our business. We cannot
predict the impact of such legislative actions on our operations.
In the U. S., the Telecommunications Act of 1996 changed the regulatory
environment for all NSPs, including competitive local exchange carriers (CLECs)
and incumbent local exchange carriers (ILECs). CLECs and ILECs are a significant
part of our customer base. The Telecommunications Act of 1996 removed federal,
state and local barriers to entry into the local telephone market by CLECs. The
Telecommunications Act of 1996 also imposed significant obligations on ILECs,
including obligations to interconnect their networks with competitors' networks
and to unbundle their networks and provide competitors with access to unbundled
network elements. The Telecommunications Act of 1996 also directs the FCC to
adopt local loop access rules to enable competitive providers of advanced
services, such as high-speed Internet access, to deploy new technologies on a
faster, more cost-effective basis to consumers. The United States Congress
continues to consider possible amendments to the Telecommunications Act of 1996.
The FCC continues to consider changes to its regulations, including
those relating to network equipment registration and the deployment of
broadband services. Effective January 2000, the FCC adopted regulations
requiring ILECs to provide unbundled access to the high-frequency portion of
the local loop, so that ILECs and CLECs can share the same copper telephone
wires to provide xDSL services (commonly referred to as the "Line-Sharing
proceeding"). The FCC also adopted spectrum compatibility and management
policies, encouraging voluntary development of industry standards to facilitate
competitive deployment of broadband services while limiting the ability of any
one class of carriers to impose unilateral or anticompetitive spectrum
compatibility or management rules on other xDSL providers. In another
proceeding, the FCC adopted rules requiring ILECs to offer competitive carriers
access to a number of listed network elements, including local loops, sub
loops, and local circuit switching (commonly referred to as the "UNE
proceeding"). In a related proceeding, the FCC has established rules requiring
ILECs to allow competing carriers to access space in the incumbent's central
office, which will enable competitors to collocate all equipment necessary for
interconnection or access to unbundled network elements (commonly referred to
as the "Collocation proceeding"). Some of the rules established in the UNE
proceeding will not be effective until May, 2000. Additionally, the UNE and
Line Sharing proceedings are currently on the remand from a U.S. Court of
appeals, therefore, the rules promulgated in these proceedings are subject to
change. Moreover, a petition for reconsideration was filed with the FCC
concerning the Collocation proceeding. Hence, the FCC is reviewing the new
collocation rules. We cannot predict whether any amendments to the
Telecommunications Act of 1996 by Congress or any changes to the FCC
Regulations, including new regulations, will have a negative impact on our
business or the businesses of our customers or suppliers.
Companies selling terminal equipment to be connected to the public
switched telephone network must register some of their products with the FCC
and conform them to technical standards promulgated by the FCC in its
regulations. These regulations are designed to protect the public switched
telephone network from harm, including interference and service degradation.
GEOGRAPHIC AREAS
For a discussion of domestic and international revenues for the fiscal
years ended December 31, 1997, 1998 and 1999, see "Note 2 -- Summary of
Significant Accounting Policies: Concentration of Credit Risk" to our Notes to
Consolidated Financial Statements as part of this Form 10-K.
ITEM 2: PROPERTIES
Our principal administrative, engineering and manufacturing facilities
are located in two leased buildings totaling approximately 333,000 square feet
in Largo, Florida. In addition, we maintain a research and development facility
of approximately 29,000 square feet in Red Bank, New Jersey. The leases for the
Largo, Florida facility and the Red Bank, New Jersey facility expire in 2007
and 2003, respectively. There are two five-year renewal options on
22
<PAGE> 25
the Largo, Florida facility. Additionally, there is an automatic extension of
the lease term of the Largo, Florida lease if the current landlord sells this
property within the first three years of the lease. The Red Bank lease is not
renewable but we retain the right to renegotiate with the landlord. We also
lease offices for branch sales and administration in the United States, Canada,
France, Egypt, Japan, Singapore and the People's Republic of China.
Collectively, these offices occupy approximately 20,000 square feet. Leases for
these facilities expire at various times during 2000 and 2002. We believe that
the current facilities will be able to accommodate anticipated expansion of
operations in these locations over the next 24 months. In addition, we have the
right of first refusal on the construction of any building on some lands
adjacent to our Largo, Florida facilities if more space is needed to expand our
manufacturing operations.
ITEM 3: LEGAL PROCEEDINGS
In the normal course of business, we are subject to proceedings,
lawsuits and other claims. While these matters could affect the operating
results of any one quarter when resolved in future periods, it is management's
opinion that after final disposition, any monetary liability or financial
impact to Paradyne beyond that provided in the consolidated balance sheet at
December 31, 1999, would not be material to our annual consolidated financial
statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
During the fourth quarter of the fiscal year covered by this report on
Form 10-K, no matter was submitted to a vote of Security Holders.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION AND HOLDERS OF RECORD
Our common stock is publicly traded on the Nasdaq National Market
(NASDAQ) under the symbol PDYN. We completed an initial public offering in
July 1999 and a secondary offering in September 1999. Prior to July 16, 1999,
there was no established public trading market for any of our securities.
On February 29, 2000, the last reported sale price of our common stock
was $44.75 per share. As of February 29, 2000, there were 31,325,382 shares of
our common stock issued and outstanding. We had 297 stockholders of record at
that date excluding stockholders owning shares in street name. Because there
may be many stockholders holding our common stock in street name, the actual
number of stockholders may be significantly greater than stated above.
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<PAGE> 26
PRICE RANGE OF COMMON STOCK
The following table represents the range of high and low sales prices
for the Company's publicly traded common stock, as reported on the Nasdaq
National Market, for the periods indicated:
HIGH LOW
------- -------
2000 FISCAL YEAR
First Quarter (January 1, 2000 - February 29,2000) 46 25 1/2
1999 FISCAL YEAR
Fourth Quarter (October 1, 1999 - December 31, 1999) 37 3/4 25
Third Quarter (July 16, 1999 - September 30, 1999) 58 27 1/4
DIVIDENDS
We have never declared or paid cash dividends. We intend to retain all
future earnings for use in the operation and expansion of the business and,
therefore, do not anticipate declaring or paying cash dividends in the
foreseeable future. In addition, our current financing arrangements place
certain restrictions on the payment of dividends and we anticipate that our
future financing arrangements may restrict our ability to pay dividends. (For a
discussion regarding restrictions on the ability to pay dividends, see
"Item 7: Management Discussion and Analysis of Financial Condition and Results
of Operation in the Liquidity and Capital Resources section") of this form 10-K.
Our Registration Statement on Form S-1 (Registration No. 333-76385)
became effective on July 15, 1999. In connection with our initial public
offering, we received net proceeds of approximately $62,240,000 after deducting
estimated underwriting discounts, commissions, and offering expenses. We used
$10.4 million of the net proceeds of the offering to repay all outstanding
indebtedness under its $35,000,000 revolving line of credit facility with Bank
of America NT&SA. We intend to use the remainder of the net proceeds for general
corporate purposes, including working capital and capital expenditures. We are
currently assessing the specific uses and allocations for these remaining funds.
RECENT SALES OF UNREGISTERED SECURITIES
As of February 29, 1999, we had sold and issued 1,708,758 shares of
our common stock to employees, officers and directors pursuant to direct
issuances and exercises of options under our 1996 Equity Incentive plan and 1999
Non-Employee Directors' plan.
The sale of the above securities was deemed to be exempt from
registration under the Securities Act in reliance upon Section 4(2) of the
Securities Act or Rule 701 promulgated under Section 3(b) of the Securities Act
as transactions by an issuer not involving any public offering or transactions
pursuant to compensation benefit plans and contracts relating to compensation
as provided under such Rule 701.
ITEM 6: SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data as of December 31,
1997, 1998, and 1999 and for the years ended December 31, 1998 and 1999 is
derived from Paradyne's consolidated financial statements which are included
elsewhere in this Form 10-K. This data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" contained elsewhere in this form 10-K. The selected consolidated
financial data for the seven months ended July 31, 1996, the five month period
ending December 31, 1996, and for the years ended December 31, 1996 and 1997 are
derived from audited consolidated financial statements which are not included in
this Form 10-K. The selected consolidated financial data for the year ended
December 31, 1995 has
24
<PAGE> 27
not been audited. The predecessor business consists of certain operating
activities of AT&T Paradyne Corporation, a wholly owned subsidiary of Lucent
Technologies Inc., on a carve-out basis, which was acquired by Paradyne
effective July 31, 1996. In the opinion of our management, the predecessor
business operated in a substantially different organizational structure and
manner than we do and, accordingly, we believe that a comparison of its
operating activities and results to ours is not meaningful. See Note 2 of the
Notes to Consolidated Financial Statements of Paradyne for an explanation of the
method used to calculate earnings per share. Earnings per share data are not
presented for the predecessor business since the predecessor business did not
have its own capital structure. As a result, this information would not be
meaningful.
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<PAGE> 28
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PREDECESSOR BUSINESS PARADYNE
-------------------------- -------------------------------------------------
SEVEN MONTHS FIVE MONTHS
YEAR ENDED ENDED ENDED YEARS ENDED
DECEMBER 31, JULY 31, DECEMBER 31, DECEMBER 31,
1995 1996 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
REVENUES:
<S> <C> <C> <C> <C> <C> <C>
SALES 259,654 128,099 | 112,293 177,850 195,153 220,174
SERVICE 3,910 1,975 | 1,413 3,040 2,256 2,617
ROYALTIES 1,425 464 | 325 413 1,392 3,118
--------- --------- | -------- -------- ---------------------
TOTAL REVENUES 264,989 130,538 | 114,031 181,303 198,801 225,909
--------- --------- | -------- -------- ---------------------
COST OF SALES: |
EQUIPMENT 137,459 73,208 | 59,634 90,334 107,921 124,125
SERVICE 3,980 1,803 | 744 1,154 620 823
--------- --------- | -------- -------- ---------------------
TOTAL COST OF SALES 141,439 75,011 | 60,378 91,488 108,541 124,948
--------- --------- | -------- -------- ---------------------
GROSS MARGIN 123,550 55,527 | 53,653 89,815 90,260 100,961
|
OPERATING EXPENSES: |
RESEARCH & DEVELOPMENT (1) 30,100 28,019 | 31,174 37,339 35,132 36,470
SELLING, GENERAL & ADMINISTRATIVE 115,155 42,928 | 29,409 66,278 55,969 55,938
AMORTIZATION OF DEFERRED STOCK |
COMPENSATION 0 0 | 0 0 0 1,501
|
RESTRUCTURING CHARGES 0 0 | 0 1,778 984 0
--------- --------- | -------- -------- ---------------------
TOTAL OPERATING EXPENSES 145,255 70,947 | 60,583 105,395 92,085 93,909
--------- --------- | -------- -------- ---------------------
|
OPERATING INCOME (LOSS) (21,705) (15,420) | (6,930) (15,580) (1,825) 7,052
|
OTHER (INCOME) EXPENSES |
INTEREST 1,437 200 | 3,502 7,712 1,711 (405)
LUCENT SETTLEMENT GAIN 0 0 | 0 (51,183) 0 0
OTHER, NET (3,708) (2,074) | 382 (1,753) 1,191 (3,911)
--------- --------- | -------- -------- ----------------------
NET INCOME (LOSS) BEFORE PROVISION FOR (19,434) (13,546) | (10,814) 29,644 (4,727) 11,368
INCOME TAX |
|
PROVISION (BENEFIT) FOR INCOME TAX 948 184 | 0 8,302 (1,082) 3,479
--------- --------- | -------- -------- ---------------------
NET INCOME (LOSS) $ (20,382) $ (13,730) | $(10,814) $ 21,342 $(3,645) $ 7,889
========= ========= | ======== ======== =====================
|
(LOSS) EARNINGS PER COMMON SHARE: |
BASIC N/A N/A | (0.42) 0.84 (0.14) 0.28
DILUTED N/A N/A | (0.42) 0.81 (0.14) 0.26
|
SHARES USED IN COMPUTING |
(LOSS) EARNINGS PER SHARE: |
BASIC N/A N/A | 25,500 25,552 25,623 28,435
DILUTED N/A N/A | 25,500 26,291 25,623 30,112
|
AS OF AS OF | AS OF AS OF
DECEMBER 31, JULY 31, | DECEMBER 31, DECEMBER 31,
------------------------ | --------------------------------------------------
1995 1996 | 1996 1997 1998 1999
(IN THOUSANDS) |
CONSOLIDATED BALANCE SHEET DATA: |
CASH AND CASH EQUIVALENTS $ 3,094 $ 5,717 | $ 1,354 $ 3,240 $ 2,356 $ 62,885
WORKING CAPITAL 26,991 20,265 | 9,990 9,606 8,382 86,351
TOTAL ASSETS 126,428 103,050 | 144,142 83,200 75,063 130,485
TOTAL DEBT 302 52 | 82,182 18,184 16,836 690
TOTAL DIVISIONAL EQUITY (2) 80,372 73,327 | -- -- -- --
TOTAL SHAREHOLDERS' EQUITY -- -- | 5,979 31,402 27,339 105,684
</TABLE>
26
<PAGE> 29
(1) Includes $13,114 of purchased research and development for the five
months ended December 31, 1996.
(2) Since the predecessor business was not a legal entity, there was no
stockholder's equity. "Divisional equity" represents the net assets of
the predecessor business.
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<PAGE> 30
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and the related notes contained elsewhere in
this Form 10-K. Certain of the matters discussed in the following pages,
particularly regarding future events, our future financial performance and
operating results, our business strategy and our financing plans, and those
preceded by, followed by or that otherwise include the words "believes,"
"expects," "anticipates," "intends," "estimates," or similar expressions
constitute "forward-looking statements" within the meaning of Section 27A of
the Securities Act of 1933, as amended. For those statements, Paradyne claims
the protection of the safe harbor for forward-looking statements contained in
the Private Securities Litigation Reform Act of 1995. These statements are only
predictions. Known and unknown risks, uncertainties and other factors could
cause our actual results to differ materially from those projected in the
forward-looking statements. In evaluating these statements, you should
specifically consider various factors, including, but not limited to, those set
forth under "Risk Factors", and other risks identified from time to time in
Paradyne's SEC reports and public announcements.
OVERVIEW
We are a leading developer, manufacturer and distributor of broadband
and narrowband network access products for network service providers ("NSPs")
and business customers. We offer solutions that enable business class, service
level managed, high-speed connectivity over the existing telephone network
infrastructure and provide for cost-effective access speeds of up to 45 Mbps.
Our equipment has been sold to over 60% of the Fortune 500 companies and in
businesses in over 150 countries. We estimate that sales to NSPs represented
approximately 65% of our total revenues in 1999. With our reputation and
history as a supplier of access solutions to a large customer base, we believe
that we are well positioned to provide broadband access solutions to NSPs and
business customers as they upgrade their networks.
In July 1996, as part of a divestiture by Lucent, Paradyne Acquisition
Corp., a wholly owned subsidiary of Communication Partners, L. P., a limited
partnership controlled by the Texas Pacific Group, acquired all of the
outstanding shares of common stock of Paradyne Corporation. In June 1999
Paradyne Acquisition Corp. changed its name to Paradyne Networks, Inc. Our
business was created when operations of Paradyne Corporation were either
retained by Lucent or assigned to newly created entities in connection with the
divestiture. The business that remained with Paradyne Corporation is referred
to as the predecessor business. The predecessor business derived most of its
revenues through July 1996 from the sale of narrowband products. The
predecessor business purchased products and services from preferred suppliers
of AT& T and Lucent and incurred intercompany charges for services provided by
other AT&T operations. Following the 1996 acquisition, we introduced a series
of new products, including many new broadband products, and discontinued sales
of the Tellabs 74X family of products which were transitioned to Lucent. In
addition, we lowered our expenses and restructured our operations. The cost of
the restructuring was accounted for as part of the purchase accounting
associated with the 1996 acquisition. We believe the revenues and expenses of
the predecessor business are not representative of our current business,
financial condition or results of operations. Accordingly, we believe that a
period-to-period comparison of operating results prior to 1997 is not
meaningful.
Through 1997, our revenues were derived principally from the sale and
service of narrowband network access products and, to a much lesser extent,
technology licensing. Our broadband products, including our Hotwire and
FrameSaver products, which were introduced in 1997, comprised the majority of
our revenue in 1998 and approximately 70% of our total revenues in 1999, and we
expect broadband products to represent an increasing portion of future
revenues. Royalty revenues consist principally of licensing of technology, and
service revenues are derived from repair of out-of-warranty products. We do not
expect that either royalty or service revenues will constitute a substantial
portion of our revenues in future periods.
In July 1999, we completed an initial public offering of 4,000,000
shares of our common stock at an initial public offering price of $17.00 per
share. We received net proceeds of approximately $61.2 million after deducting
estimated underwriting discounts and commissions and other offering expenses.
In September 1999 the Company and certain of the stockholders of the Company
sold 20,000 and 5,000,000 shares of their common stock, respectively, in a
secondary offering.
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<PAGE> 31
We market and sell our products worldwide to NSPs and business
customers through a multi-tier distribution system that includes direct sales,
strategic partner sales, NSP sales and traditional distributor or value added
reseller sales. Direct sales and services performed for Lucent in 1999
accounted for approximately 27% of our total revenues. Sales to Tech Data
accounted for approximately 8% of our total revenues. We estimate that
approximately 58% of our 1999 sales to Tech Data represented products that were
resold to Lucent. Collectively, we estimate that direct and indirect sales to,
and service performed for, Lucent accounted for approximately 31% of our total
revenues in 1999 versus 47% in 1998. This percentage reduction principally
results from lower Lucent equipment sales of some of our older products in
1999. A majority of our sales to Lucent represented sales to Lucent as a
reseller of our products. Sales to SITA, an NSP, accounted for approximately 7%
of our total revenues in 1999, and sales to Rhythms, an NSP, accounted for
approximately 25% of our total revenues in 1999 versus 6% in 1998. The
percentage increase of our total revenues to Rhythms in 1999 is primarily due
to an increase in the deployment of their infrastructure using our products. A
loss or a significant reduction or delay in sales to any of our major customers
could materially and adversely affect our business, financial condition and
results of operations.
We generally recognize revenue from product sales upon shipment. No
revenue is recognized on products shipped on a trial basis. Estimated sales
returns based on historical experience by product are recorded at the time the
product revenue is recognized. Charges for warranty work are included in cost
of equipment sales. We believe that our accrued warranty reserve is sufficient
to meet our responsibilities for potential future warranty work on products
sold. Revenue from services, which consists mainly of repair of out-of-warranty
products, is recognized when services are performed and all substantial
contractual obligations have been satisfied. License and royalty revenues are
recognized when we have completed delivery of technical specifications and
performed substantially all required services under the related agreement.
We expect our gross margin to be affected by many factors, including
competitive pricing pressures, fluctuations in manufacturing volumes, costs of
components and sub-assemblies, the mix of products or system configurations
sold and timing of sales of follow-on line cards and endpoints for central
office systems. Follow-on line cards and endpoints are components that are sold
separately from central office systems and margins vary on these products.
Central office systems are often sold as stand-alone chassis with a limited
number of line cards. Customers purchase follow-on line cards and endpoints in
order to increase the capacity of their central office system. Additionally,
our gross margin may fluctuate due to changes in our mix of distribution
channels. Sales prices of some of our products have decreased recently as a
result of increased competition. Further price reductions may be necessary to
remain competitive. Although we have been able to offset most price declines
with reductions in our manufacturing costs, there can be no assurance that we
will be able to offset further price declines with cost reductions.
Research and development expenses primarily consist of: personnel
costs related to engineering and technical support; consultant and outside
testing services fees; research and development facilities expenses; equipment
and supplies expenses associated with enhancing existing products and the
development of new products; an allocation of information systems charges; and
software and software maintenance expenses. We expense all research and
development expenses as incurred. We believe that continued investment in
research and development is critical to attaining our strategic product and
cost-reduction objectives. We will, however, attempt to control and optimize
our research and development expenditures in order to meet our strategic goals
while at the same time allowing us to meet our profitability goals. Over time,
as revenues increase, research and development expenditures are expected to
increase as well.
Selling, general and administrative expenses primarily consist of:
salaries, commissions and related expenses for personnel engaged in marketing,
sales and field service support functions, finance, human resource and
administrative activities; advertising, promotional and trade show expenses,
including the related travel expenses; consultant fees; equipment and
facilities expenses, including intangibles amortization; supplies, software and
software maintenance; and consignments. We intend to continue to invest in
selling, marketing and promotional programs. In addition, we expect to expand
our field sales operations and customer support organizations. We expect
general and administrative expenses to increase moderately as our business
grows and we continue operations as a public company. General and administrative
expenses have been significantly reduced since the 1996 acquisition by
improving systems and processes and eliminating unnecessary expenses, and we
expect to continue our focus on controlling expenses in the future.
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<PAGE> 32
Sales to customers outside of the United States accounted for
approximately 30%, 20% and 18% of revenues in 1997, 1998 and 1999, respectively.
This decrease was primarily due to the decline in sales of our older narrowband
products and economic instability in Asia. In 1999, approximately 96% of our
sales were denominated in U. S. dollars. While Paradyne is subject to
fluctuations in foreign currency exchange rates with respect to income derived
from international sales not denominated in U. S. dollars, the costs associated
with a majority of these sales are in the same currency, which partially
mitigates the effect of such fluctuations. Historically, currency exchange
movements have not had a material effect on our business, financial condition or
results of operations. If our non-U. S. operations expand, the effect of
currency fluctuations may have a more significant impact on our revenues and
costs. At December 31, 1999, we had no material monetary assets, liabilities or
commitments denominated in currencies other than U. S. dollars. We do not hedge
foreign currency transactions. Our strategy for managing currency risk is to
minimize our foreign currency exposure.
Despite growing revenues and being profitable in 1999, we may incur
net losses. In addition to the customer concentration we have experienced, we
also have lengthy development and sales cycles for our products, and there is
often a significant delay between the time we incur expenses and the time we
realize the related revenue. To the extent that future revenues do not increase
significantly in the same periods in which operating expenses increase, our
operating results will be adversely affected. Our quarterly and annual
operating results have fluctuated in the past and are likely to fluctuate in
the future due to a variety of factors, many of which are outside of our
control. For further discussion regarding fluctuations in our operating
results, see "Risk Factors -- Various Factors Could Cause Our Results to
Fluctuate" and "-- We May Not Achieve Revenue Growth and Profitability" in this
Form 10-K.
RESULTS OF OPERATIONS
The following table summarizes Paradyne's operating results as a
percentage of revenues for each of the periods shown:
30
<PAGE> 33
<TABLE>
<CAPTION>
Predecessor Business Paradyne
---------------------------------------------------------------------------------------
Fiscal Year ended Seven months ended Five months ended Fiscal Year ended
December 31, July 31, December 31, December 31,
1995 1996 1996 1997 1998 1999
---- ---- ---- ---- ---- ----
Revenues:
<S> <C> <C> <C> <C> <C> <C>
Sales 98.0 98.1 98.5 98.1 98.2 97.5
Service 1.5 1.5 1.2 1.7 1.1 1.2
Royalties 0.5 0.4 0.3 0.2 0.7 1.4
----- ----- ----- ----- ----- -----
Total revenues 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of sales:
Equipment 51.9 56.1 52.3 49.8 54.3 54.9
Service 1.5 1.4 0.7 0.6 0.3 0.4
----- ----- ----- ----- ----- -----
Total cost of sales 53.4 57.5 52.9 50.5 54.6 55.3
----- ----- ----- ----- ----- -----
Gross margin 46.6 42.5 47.1 49.5 45.4 44.7
Operating Expenses:
Research & Development 11.4 21.5 27.3 20.6 17.7 16.1
Selling, general & administrative 43.5 32.9 25.8 36.6 28.2 24.8
Amortization of Deferred Stock
Compensation 0.0 0.0 0.0 0.0 0.0 0.7
================
Restructuring charges 0.0 0.0 0.0 1.0 0.5 0.0
----- ----- ----- ----- ----- -----
Total operating expenses 54.8 54.3 53.1 58.1 46.3 41.6
----- ----- ----- ----- ----- -----
Operating income (loss) (8.2) (11.8) (6.1) (8.6) (0.9) 3.1
Other (income) expenses
Interest 0.5 0.2 3.1 4.3 0.9 (0.2)
Lucent settlement gain 0.0 0.0 0.0 (28.2) 0.0 0.0
Other, net (1.4) (1.6) 0.3 (1.0) 0.6 (1.7)
----- ----- ----- ----- ----- -----
Net income (loss) before provision for (7.3) (10.4) (9.5) 16.4 (2.4) 5.0
income tax
Provision (benefit) for income tax 0.4 0.1 0.0 4.6 (0.5) 1.5
----- ----- ----- ----- ----- -----
Net income (loss) (7.7) % (10.5) % (9.5) % 11.8 % (1.8) % 3.5 %
</TABLE>
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Revenues. Total revenues increased $27.1 million, or 13.6% to $225.9
million for the year ended December 31, 1999 from $198.8 million for the same
period in 1998. The increase was primarily due to an increase in the volume of
sales of our broadband access products. As a percentage of total revenues,
equipment sales were 97.5% of total revenues for the year ended December 31,
1999 compared to 98.2% for the year ended December 31, 1998. The percentage
decrease is mostly due to a $1.7 million increase in royalty income in 1999
which includes $1.1 million from a one-time royalty fee from Globespan related
to termination of an existing agreement, and $1.5 million from a one-time
license fee from a third party for intellectual property relating to narrowband
technology. See Note 2 of Consolidated Financial Statements for table showing
revenues by geographic regions.
Gross Margin. Gross margin increased $10.7 million or 11.9% to $101.0
million for the year ended December 31, 1999 from $90.3 million for the year
ended December 31, 1998. Most of the increase results from increased sales of
our broadband access products and a $1.7 million increase in royalty revenues.
Gross margin as a percentage of total revenues decreased to 44.7% in 1999 from
45.4% in 1998 primarily because our newer, competitively priced products
comprised a greater portion of our total revenues.
Research and Development Expenses. Research and development expenses
increased $1.3 million, or 3.8%, to $36.4 million for the year ended
December 31, 1999 from $35.1 million for the year ended December 31, 1998. As a
percentage of total revenues, research and development expense decreased to
16.1% for the year ended
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<PAGE> 34
December 31, 1999 from 17.7% for the year ended December 31,1998. This decrease
is primarily attributable to the increase in revenue during the period.
Selling, General and Administrative (SG&A) Expenses. SG& A expenses
decreased by $0.1 million, or .2% to $55.9 million for the year ended December
31, 1999 from $56.0 million for the year ended December 31, 1998. SG& A as a
percentage of total revenues decreased to 24.8% for the year ended December 31,
1999 from 28.2% for the year ended December 31, 1998. This decrease resulted
primarily due to the increase in total revenue during the period.
Deferred Stock Compensation. Deferred stock compensation is related to
the previous granting of stock options to employees at prices deemed to be
below fair market value for financial reporting purposes. The $1.5 million
deferred stock compensation charge in 1999 was due to both the vesting of stock
options as a result of our initial public offering in July 1999 ($1.1 million)
which subjected certain stock options to variable plan accounting, and the
amortization of deferred stock compensation over the vesting period of the
options, generally four years ($.4 million).
Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, increased by $7.2 million, or 248%, to $4.3 million of income for
the year ended December 31, 1999 from $2.9 million of expense for the year ended
December 31, 1998. Interest and other (income) expense, net, is related to
interest on notes payable and borrowings under lines of credit, interest on
short term investments, gains and losses on equity investments and foreign
exchange gains and losses. This increase was primarily attributable to the
receipt by Paradyne of approximately $4.3 million of income from the sale of
patents' a loss on an equity investment of $1.4 million in 1998 that did not
reoccur in 1999; Our recognition of $.4 million of net interest income in 1999
compared to $1.7 million of net expense in 1998 as a result of earnings from the
investment of proceeds from the initial public offering and the retirement of
debt using the initial public offering proceeds during the third quarter of
1999, and our recording of a foreign exchange loss of $400,000 in 1999 compared
to a gain of $.2 million in 1998.
Provision (Benefit) For Income Taxes. Provision (benefit) for income
taxes increased by $4.6 million, or 422%, to $3.5 million of provision for the
year ended December 31, 1999 from $1.1 million of benefit for the same period
in 1998. The tax provision is less than the statutory federal and state income
tax rates principally due to the availability of research tax credits, as our
secondary offering in September 1999 reduced the Texas Pacific Group's
ownership below 50%, allowing us to take advantage of a tax credit in 1999 for
increased research spending.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
Revenues. Total revenues increased $17.5 million, or 9.7%, to $198.8
million in 1998 from $181.3 million in 1997. This increase was primarily due to
an increase in the sales of our broadband access products. The increase in
sales was primarily a result of higher average selling price due to product mix
and to volume increases in broadband products. As a percentage of total
revenues, equipment sales were 98.2% in 1998 compared to 98.1% in 1997. In 1998
and 1997, we also earned relatively small amounts of service revenues through
the repair of out of warranty equipment and royalty revenues from the licensing
of technology. See Note 2 of Consolidated Financial Statements for table
showing revenues by geographic regions.
Gross Margin. Gross margin increased $400,000, or 0.5%, to $90.3
million in 1998 from $89.8 million in 1997. Gross margin as a percentage of
total revenues decreased to 45.4% in 1998 from 49.5% in 1997 for the following
reasons:
- some of our older products faced competitive price pressures, which
resulted in lower average sales prices and accounted for a decline
in gross margin of approximately 3 percentage points out of the 4.1
percentage point net decline in gross margin; and
- In 1997 we had a large one-time customer purchase of an
out-of-production product for which we were able to obtain a
substantially higher than average sales price. No similar purchase
occurred in 1998, resulting in a decrease in gross margin of 1
percentage point out of the 4.1 percentage point net decline in
gross margin.
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Research and Development Expenses. Research and development expenses
decreased $2.2 million, or 5.9%, to $35.1 million in 1998 from $37.3 million in
1997. This decrease was primarily due to a reduction in the number of
contractors and a decrease in employees, as a result of the restructuring in
November 1997. Research and development expenses declined to 17.7% of total
revenues in 1998 from 20.6% in 1997 primarily due to the increase in total
revenues in 1998 along with the expense reductions.
Selling, General and Administrative Expenses. SG&A expenses decreased
$10.3 million, or 15.6%, to $56.0 million in 1998 from $66.3 million in 1997.
The decrease was primarily attributable to a $6.4 million reduction in
amortization expense related to the Lucent settlement, a $3.3 million reduction
in consultant fees and a $2.4 million decrease in advertising costs, offset by
a $900,000 increase in personnel costs and a $900,000 increase in rental
expenses. SG& A expenses as a percentage of total revenues decrease to 28.2% in
1998 from 36.6% in 1997 primarily due to the increase in total revenues in 1998
along with expense reductions.
Restructuring Charges. During 1998, we incurred expenses of $1.0
million, or 0.5% of total revenues, related to restructuring our international
operations.
Interest and Other (Income) Expense, Net. Interest and other (income)
expense, net, decreased $3.1 million, or 51.3%, to $2.9 million in 1998 from
$6.0 million in 1997. Interest and other (income) expense, net, is related to
interest on notes payable and borrowings under lines of credit, gains and
losses on equity investments and foreign exchange gains and losses. The
decrease in 1998 was primarily attributable to a reduction in interest expense
associated with the $63.0 million forgiveness of debt by Lucent in 1997.
Income Taxes. Our 1998 income tax benefit was $1.1 million, or 22.9%
of the loss before income tax of $4.7 million. The tax benefit was less than
the statutory federal and state income tax rates principally due to losses
incurred in foreign jurisdictions for which no income tax benefit was
available.
LIQUIDITY AND CAPITAL RESOURCES
Our cash and cash equivalents increased $60.5 million to $62.9 million
at December 31, 1999 from $2.4 million at December 31, 1998. Working capital
increased $78.0 million from $8.4 million at December 31,1998 to $86.4 million
at December 31, 1999. This increase is primarily attributable to our initial
public offering in July 1999 and a secondary offering in September 1999 through
which we received combined net proceeds of approximately $61.5 million.
Cash provided by operations for the year ended December 31,1999
totaled $14.4 million and resulted primarily from net income which, after
adjusting for non-cash impacting items such as depreciation and amortization,
provision for bad debts, and deferred income taxes totaled $15.9 million. A
major contributor to this net income was the net proceeds from a license of
intellectual property related to modem technology and the sale of patents
totaling $5.5 million. Also contributing to cash provided by operations was a
reduction in inventories totaling $3.7 million resulting primarily from a
December 1998 purchase of OEM product that did not occur in 1999, tax refunds
in 1999 totaling $3.7 million, and a $1.6 million increase in payroll and
benefit related liabilities resulting primarily from withholdings associated
with the employee stock purchase plan that did not exist in at December
31, 1998 as well as an increase in accruals for commissions, bonuses, and profit
sharing in 1999 compared to 1998. Decreases to cash from operating activities
partially offsetting the above contributions included a $8.8 million reduction
in accounts payable resulting primarily from the timing of purchases from and
payments to OEM vendors.
Capital expenditures in support of operations totaled $6.7 million,
$6.9 million, and $9.6 million for the years ended December 31, 1999, 1998, and
1997, respectively. Expenditures in 1999 included improvements to our
manufacturing facility totaling $1.3 million, investments in test and
production equipment associated with new product development totaling $3.2
million, and investments in our information systems totaling $1.6 million. Net
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<PAGE> 36
expenditures in 1998 and 1997 related primarily to a new Year 2000 enterprise
resource planning system and to the support of operations.
Gross proceeds from our initial public offering, secondary offering
and exercise of stock options totaled $68.5 million. A portion of these
proceeds was used to pay down the Bank of America NT&SA revolving credit
facility.
We are a holding company with no business operations of our own. In
the event we incur obligations, we would be dependent on payments, loans,
dividends and distributions from our subsidiaries for funds to pay our
obligations. The ability of our subsidiaries to pay dividends or distributions
or make loans to us is subject to restrictions. We maintain a revolving line of
credit facility with Bank of America NT&SA although no amounts are currently
outstanding. Originally, this was a $45 million facility that we voluntarily
reduced to $35 million in March 1999. On January 1, 2000 the Company
voluntarily reduced this facility to $30 million, reduced the unused line fee
to 0.25%, and extended the facility through January 31, 2001. Under the line of
credit agreement, neither Paradyne Corporation nor its Canadian subsidiary may
pay dividends or make distributions to us unless Paradyne Corporation and its
subsidiaries meet minimum financial ratios related to earnings, interest
expense and total indebtedness and obtain the prior approval of Bank of America
NT&SA.
We believe that the proceeds from our offerings, together with cash
flows from operations and borrowing availability under the Bank of America
NT&SA line of credit facility, will be sufficient to meet our working capital
needs for at least the next eighteen months.
YEAR 2000 ISSUES
Background: Some computers, software and other equipment include
programming code in which calendar year data is abbreviated to only two digits.
As a result, some of these systems could fail to operate or fail to produce
correct results, if, for example, 00 is interpreted to mean 1900 rather than
2000. These problems are commonly referred to as the Year 2000 problem. Although
it was widely expected that the Year 2000 problem would affect most systems
beginning on January 1, 2000, as of the date of this Form 10-K, neither we nor,
to our knowledge, our service providers, distributors and suppliers who use our
systems have experienced any Year 2000 problems. However, despite the passing of
January 1, 2000, it is widely believed that there is a continued risk of Year
2000 problems which may occur in the first quarter of the year 2000 and possibly
beyond.
Assessment: In 1996 we identified the Year 2000 problem as a potential
risk to our operations. As a result, we developed a comprehensive multi-year
plan to make our internal computer software and hardware systems Year 2000
compliant. Our Year 2000 compliance plan was comprised of 3 phases: an
assessment phase; an implementation phase; and a testing phase. This plan,
initiated in the first quarter of fiscal 1997, has been completed by us. While
we believe that we have implemented a comprehensive plan for addressing the
Year 2000 problem, we cannot be certain that these Year 2000 compliance efforts
will be successful in the year 2000 and beyond. Nonetheless, to date, we have
incurred expenses related to Year 2000 readiness of approximately $3.7 million.
Internal Infrastructure: We believe that we have identified all of the
major computer hardware, software applications and other calendar year
dependent equipment used in connection with our internal operations. Our Year
2000 compliance plan addressed items that needed to be modified, upgraded, or
replaced in order to minimize the possibility of a material disruption of our
business. We have replaced our accounting, sales, distribution and
manufacturing systems with what we believe to be a Year 2000 compliant
enterprise resource planning system. We have replaced our human resource and
payroll systems application software with what we believe to be Year 2000
compliant software, and we have replaced our internal phone system and
associated equipment with what we believe to be a Year 2000 compliant system.
We have modified, upgraded and replaced, as appropriate, other computer
software applications, hardware, and equipment that could potentially be
adversely affected by the Year 2000 problem. Monthly updates on Year 2000
activities are made available to all employees.
Network Service Providers: Our ongoing operations are dependent on the
uninterrupted service provided to us by our voice (landline and wireless), data
and Internet service vendors. As part of our assessment of potential
34
<PAGE> 37
Year 2000 problems, we initiated communications with our various service
providers and received assurance that they have or will address Year 2000
compliance issues associated with their ability to provide uninterrupted
service. Despite the passing of January 1, 2000, any future failure of these
vendors to resolve Year 2000 issues in a timely manner could materially and
adversely affect our business, financial condition and results of operation.
Distributors and Suppliers: As part of our assessment of potential
Year 2000 problems, we initiated communications with our key distributors,
service support providers and suppliers to establish the status of their Year
2000 compliance. We communicated with our major suppliers of minicomputers,
servers, computers, software and other equipment used, operated or maintained
by us to identify and, to the extent possible, resolve issues associated with
the Year 2000 problem. We also gathered Year 2000 compliance information from
web sites and other public sources for our second and third-tier distributors
and suppliers. We believe that we identified all of the potential Year 2000
problems with respect to these distributors, service support providers and
suppliers and received their commitment to resolve any outstanding issues in a
timely manner. However, any failure on our part to identify potential third
party Year 2000 problems or any failure of these parties to resolve any
outstanding issues with their systems in a timely manner could materially and
adversely affect our business, financial condition and results of operations.
As we must rely to a large extent on representations made by our
suppliers and distributors from surveys and questionnaires, a failure by these
parties to adequately address and resolve Year 2000 problems poses the most
likely unresolved Year 2000 risk to us. In the event our suppliers are unable
to adequately address Year 2000 problems, such inability could disrupt their
supply of critical components to us for the manufacture of our products.
Contingency Plans: We developed contingency plans to be implemented as
part of our efforts to identify and correct Year 2000 problems that could
affect our internal systems during the year 2000 and beyond. Depending on the
systems affected, these plans could include (i) accelerated replacement of
affected equipment or software, (ii) increased work hours for our personnel or
use of contract personnel to correct on an accelerated schedule any Year 2000
problems which may arise, (iii) the provision of manual workarounds for
information systems and (iv) other similar approaches. If we are required to
implement any of these contingency plans, such plans may have a material
adverse effect on our business, financial condition or results of operations.
The discussion of our efforts and expectations relating to Year 2000
compliance are forward-looking statements. Our ability to achieve Year 2000
compliance and the level of incremental costs associated with achieving this
compliance could be adversely impacted by, among other things, the availability
and cost of programming and testing resources, the ability of parties with whom
we interact to resolve Year 2000 issues and unanticipated problems identified
in our ongoing compliance review.
INFLATION
Because of the relatively low levels of inflation experienced in 1997,
1998 and 1999, inflation did not have a significant effect on our results in
such years.
RISK FACTORS WHICH MAY IMPACT FUTURE OPERATING RESULTS
Factors that are likely to affect our results of operations in the
future include the following:
RAPID TECHNOLOGICAL CHANGE COULD RENDER OUR PRODUCTS OBSOLETE
The telecommunications and data communications markets are
characterized by rapid technological change. Our success will depend on our
ability to adapt and to respond to technological changes. If we fail to keep
pace with technological change, our product sales could suffer.
Our existing products could become obsolete or unmarketable as a
result of the emergence of new industry standards or customer demands. For
example, our customers could determine that they no longer require service
level management, or SLM, with network access products. Furthermore, our
products could become obsolete or unmarketable as a result of any new
technology or products which are superior to ours. We may be unable to
35
<PAGE> 38
compete effectively if we are unable to adapt to changes in industry standards,
meet customer demands or develop new products or enhancements to existing
products.
Our products compete with numerous high-speed access technologies,
including cable modems, satellite technology and other wireless technologies.
These competing technologies may ultimately prove to be superior to our
products. Our products may become uncompetitive or obsolete as a result of the
development of competing technologies that are more reliable, faster and less
expensive than our technology. For example, substantially all of our products
are deployed in networks that use standard copper telephone wires. The physical
properties of copper wire limit the speed and distance over which data can be
transmitted. Service levels degrade as distance from the central switching
station increases. Other competing technologies, such as wireless and cable are
not subject to such limitations.
OUR SUCCESS WILL DEPEND ON THE ACCEPTANCE OF NEW TELECOMMUNICATIONS SERVICES
BASED ON DSL
Our future success is substantially dependent upon whether DSL
technology gains widespread market acceptance by network service providers, or
NSPs, and end users of their services. If DSL technology fails to gain
widespread acceptance, our revenues and results of operations may be adversely
affected. Historically, we focused on providing innovative solutions to the
narrowband access market. We, however, are increasingly focusing on the
broadband access market. We have invested substantial resources in the
development of DSL technology, and many of our products are based on DSL
technology. Many NSPs continue to evaluate DSL technology and other alternative
high-speed data access technologies, but they may not continue to pursue the
deployment of DSL technology. Even if NSPs adopt policies favoring full-scale
deployment of DSL technology, they may not choose to purchase our DSL product
offerings. In addition, we have limited ability to influence or control
decisions made by NSPs. NSPs are continuously evaluating alternate high-speed
data access technologies and may, at any time, adopt technologies other than
the DSL technologies offered by us.
WE ARE SUBSTANTIALLY DEPENDENT ON NETWORK SERVICE PROVIDERS, WHO MAY REDUCE OR
DISCONTINUE THEIR PURCHASE OF PRODUCTS OR SERVICES AT ANY TIME
We estimate that sales to NSPs accounted for approximately 65% of our
total revenues in 1999. If our NSP customers are forced to defer or curtail
their capital spending programs, we could lose, or experience delays or
reductions in significant sales to such customers. Given the capital
requirements, complex regulatory framework and other barriers to entry in the
market, there are a limited number of NSPs. The market for many of the services
provided by NSPs has only begun to emerge since the passage of the
Telecommunications Act of 1996 and many NSPs are still building their
infrastructure and rolling out their services. Many of these NSPs still need to
develop, construct and expand their networks. The inability of our emerging NSP
customers to complete development of their networks, attract or retain
customers, respond to trends such as price reductions for their services or
diminished demand for telecommunications services generally, could cause them
to reduce their capital spending programs.
Generally, our NSP customers do not have an obligation to purchase
additional products or services from us. Termination of purchase arrangements
with these NSP customers or a significant reduction or delay in the amount of
our products they order could materially and adversely affect our revenues. In
addition, the telecommunications industry has recently experienced
consolidation, which may cause us to lose NSP customers. The loss of one or
more of our NSP customers could also materially and adversely affect our
revenues.
OUR SUCCESS DEPENDS ON NETWORK SERVICE PROVIDERS INCORPORATING OUR PRODUCTS INTO
THEIR INFRASTRUCTURE
We anticipate that a significant portion of our future revenues will be
attributable to sales to NSPs of our DSL, SLM and other broadband products. Our
future performance will therefore be substantially dependent on incorporation
of our products by NSPs into their service offerings to subscribers. The
failure of our products to become an accepted part of NSPs' service offerings
or a slower than expected increase in the volume of sales by us of SLM products
could materially and adversely affect our revenues. Our success in the NSP
market will depend on numerous factors, many of which are outside our control.
Some of these factors include:
- - NSP and subscriber acceptance of and satisfaction with our products;
36
<PAGE> 39
- - the realization of operating cost efficiencies for NSPs when SLM products
are deployed and our ability to demonstrate these operational benefits;
- - subscriber demand for our products and support for our products within the
NSPs' sales force;
- - our successful development of systems and products that address the
requirements for products deployed as part of an NSP's infrastructure;
- - the timing and successful completion of integration development work by
NSPs to incorporate our SLM functionality into their operational support
system; and
- - the absence of new technologies that make our products and systems
obsolete before they can achieve broad acceptance.
VARIOUS FACTORS COULD CAUSE OUR RESULTS TO FLUCTUATE
Paradyne's quarterly and annual results of operations have fluctuated
in the past and are likely to fluctuate significantly in the future due to a
variety of factors, many of which are outside of our control. Fluctuations in
our results could cause our stock price to decline substantially. Some of these
factors that might affect our results of operations include:
- - The timing and amount of, or cancellation or rescheduling of, orders for
our products and services to existing and new customers. This may
adversely affect our operating results in any particular quarter if we
were unable to recognize revenue for a particular sale in the quarter in
which such sale was expected.
- - Our ability to develop, introduce, ship and support new products and
product enhancements and manage product transitions on a timely basis. Our
failure to accomplish these tasks could render our products obsolete or
non-competitive, particularly since technology in our industry changes
often. As a result, customers may decide to purchase competitive products,
which could cause our revenues to suffer.
- - Announcements, new product introductions and reductions in price of
products offered by our competitors. These events could also cause our
customers to decide to purchase the products of our competitors which
would adversely affect our revenues and, therefore, our results of
operations. Also, we may feel it necessary to reduce prices of our
products, which could impact operating margins and net income.
- - Our ability to achieve cost reductions. As with all companies, we
constantly strive to improve our margins through reductions in our cost of
sales. Failure to reduce our costs could reduce our margins which in turn
could adversely affect our ability to operate profitably.
- - Our ability to obtain sufficient supplies of sole or limited source
components for our products. If we cannot obtain components for our
products, we may be unable to produce sufficient quantities of our
products to meet demand. As a result, our revenues could be adversely
affected. This is particularly true with respect to obtaining sole or
limited source components because replacement sources, if any, will take
time to identify.
- - The timing and rate of deployment of our products by NSPs. The timing and
rate of deployment by NSPs can affect sales of products to these NSPs and,
in turn, our operating results.
- - Preferential pricing arrangements. We have preferential pricing
arrangements with some of our customers. In our effort to win new business
we may negotiate preferential pricing arrangements in the future with
other customers. While these arrangements are intended to provide greater
revenue, they will have a negative impact on our margins. Furthermore,
because our strategy relies on entering into these arrangements in the
future, if we fail to do so, our results could be below expectations.
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<PAGE> 40
- - Our ability to attain and maintain production volumes and quality levels
for our products. Many factors could affect our ability to maintain
production volumes and quality levels. They include an inability to obtain
raw materials or components, labor shortages, and the maintenance of
adequate facilities for production. If we fail to maintain production
volumes or quality level we may be unable to produce sufficient quantities
of our products to meet demand, which would adversely affect our revenues.
- - The mix of products sold and the mix of distribution channels through
which they are sold. The mix of products sold can adversely affect our
results. Margins vary within our newer and older products. If we fail to
successfully sell our higher margin products, our gross margins may be
lower than expected. In addition, some distribution channels have higher
costs associated with sales. As a result, the mix of distribution channels
may adversely affect operating income.
- - Fluctuations in demand for our products and services, especially by our
major customers. Because we are highly dependent on sales to a relatively
small numbers of customers, changes in demand from those customers can
have a disproportionately large effect on our revenues and results of
operations. For example, direct and indirect product sales to, and
services performed for, Lucent constituted approximately 31% of our total
revenues in 1999. If Lucent's demand for our products in future years were
to decline, our revenues would suffer.
- - Expiration of favorable supply or purchase contracts. For example, we
currently have a supply agreement with Lucent under which we are the
exclusive supplier through June 2001 of Lucent's requirements for
stand-alone network access products for resale. As a result, Lucent must
purchase these products from us. Direct and indirect sales of these
products to Lucent accounted for approximately 30% of our total revenues in
1999. After the expiration of the agreement, we may be unable to negotiate
a new supply agreement. If we are unable to negotiate a new supply
agreement, Lucent could enter into a supply agreement with another party or
purchase these products from multiple providers. In either case, our sales
of these products would decline substantially.
- - Costs relating to possible acquisitions and integration of technologies or
businesses. The cost to acquire technologies and businesses is
substantial. In addition to the direct costs, there are significant
indirect costs related to integration of personnel and technologies and
potential product redesign. These costs may decrease operating income or
increase operating loss if they are not offset by comparable increases in
revenue.
In addition, conditions in the telecommunications market, including
consolidation in the industry, and economic conditions generally could
adversely affect both our revenues and costs. Due to these and other factors,
period-to-period comparisons should not be relied upon as indications of future
performance. It is possible that in some future periods, our operating results
and/or our growth rate will be below what public market analysts and investors
expect.
WE MAY NOT SUSTAIN REVENUE GROWTH OR PROFITABILITY
We cannot be certain that we will continue to achieve revenue growth
or realize sufficient revenues to achieve continued profitability. Excluding a
one-time gain in connection with a contract renegotiation with Lucent in 1997
and the related tax effect, we had an accumulated net deficit of approximately
$29.3 million during the period from August 1, 1996 through December 31, 1999.
In 1999, we had net income of $7.9 million. Prior to that time we had not been
profitable in any fiscal year of operations except in 1997 when we were
profitable as a result of the non-recurring gain in connection with the
renegotiation of a contract with Lucent. We anticipate that we will continue to
incur significant product development and selling, general and administrative
expenses and, as a result, we will need to generate higher revenues to achieve
and sustain profitability on an annual basis.
OUR DEPENDENCE ON ONLY A FEW MAJOR CUSTOMERS FOR A SUBSTANTIAL PORTION OF OUR
REVENUES EXPOSES US TO FINANCIAL RISKS
We depend on a small number of customers for a substantial portion of
our revenues. As a result, a loss or a significant reduction or delay in sales
to any of our major customers could materially and adversely affect our
revenues. Direct product sales to Lucent and services performed for Lucent in
1999 accounted for approximately
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<PAGE> 41
27% of our total revenues. Sales to Tech Data Corporation, a distributor, in
1999 accounted for approximately 8% of our total revenues. We estimate that
approximately 58% of our sales to Tech Data represented products that were
resold to Lucent. Collectively, we estimate that direct and indirect sales to,
and services performed for, Lucent accounted for approximately 31% of our total
revenues in 1999. Sales to SITA, an NSP, in 1999 accounted for approximately 7%
of our total revenues in 1999 and sales to Rhythms, also an NSP, accounted for
approximately 25% of our total revenues in 1999. Unless and until we diversify
and expand our customer base, our future success will significantly depend upon
certain factors which are not within our control, including:
- - the timing and size of future purchase orders, if any, from our larger
customers;
- - the product requirements of our customers;
- - the financial and operational success of our customers; and
- - the success of our customers' services deployed using our products.
Diversification and expansion of our customer base is particularly
critical because of the highly competitive nature of our business. Our
contracts are generally subject to annual renewal with the exception of our
contracts with Lucent and several other customers, which have two to five year
terms, and our customers generally do not have any obligation to purchase
products solely from Paradyne. Under a supply agreement between Lucent and
Paradyne, Paradyne is the exclusive supplier of Lucent's requirements for stand
alone network access products, such as our FrameSaver products, for resale
through June 2001.
WE COMPETE IN HIGHLY COMPETITIVE MARKETS AND COMPETITION COULD HARM OUR ABILITY
TO SELL PRODUCTS AND SERVICES
The telecommunications market is highly competitive. We compete
directly with other providers of broadband and narrowband access equipment. If
we are unable to compete effectively in the market for our products or
services, our revenue and future profitability could be materially and
adversely affected. We believe that competition may increase substantially as
the introduction of new technologies, deployment of broadband networks and
potential regulatory changes create new opportunities for established and
emerging companies in the industry. We expect that competition for products
that address the broadband access market will grow as more established and new
companies focus on this market.
Many of our current and potential competitors are larger than we are
and have significantly greater financial, sales and marketing, technical,
manufacturing and other resources and more established channels of
distribution. As a result, these competitors may be able to respond more
rapidly to new or emerging technologies and changes in customer requirements,
or to devote greater resources to the development, promotion and sale of their
products. Our competitors may enter our existing or future markets with
solutions that may be less costly, provide higher performance or additional
features or be introduced earlier than our solutions.
Our markets are characterized by increasing consolidation both within
the data communications sector and by companies combining or acquiring data
communications products and technology for delivering voice-related services,
as exemplified by the recent acquisitions of Ascend by Lucent, Diamond Lane by
Nokia and Xylan by Alcatel. We cannot be sure of the impact of any of these
acquisitions on the competitive environment for our products. Increased
competition and consolidation could result in price reductions and a decrease
in our market share.
OUR DEPENDENCE ON DEVELOPMENT RELATIONSHIPS COULD THREATEN OUR ABILITY TO SELL
PRODUCTS
Our success is dependent upon our continued relationship with certain
companies, including Lucent, GlobeSpan, NetScout and Alcatel. If any of these
companies breaches or terminates its agreement or fails to perform its
obligations under its agreement, we might not be able to sustain or grow our
business. In particular, if any of these companies, other current corporate
partners or future corporate partners discontinue their support of products
that we have developed in cooperation with them, fail to continue to develop
product enhancements required to meet
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customer demand, fail to appropriately address performance issues related to
products that we have developed in cooperation with them, face claims of
infringement of third party intellectual property rights with respect to the
technology included in products that we have developed in cooperation with them
or fail to continue to support joint marketing programs, our ability to sell
products that we have developed in cooperation with them would be hampered.
Additionally, in the event that any of our significant relationships are
terminated, we may not be able to replace them in a timely manner, if at all.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MIGHT BE HARMED IF WE LOSE SALES OF
ACCESS PRODUCTS TO LUCENT
We have a relationship with Premisys Communications through which we
have exclusive distribution rights through April 2005 for Premisys' IMACS
system, which we market to Lucent and AT&T under the name Acculink Access
Controller. We have also entered into a supply and exclusivity agreement with
Lucent under which we are the exclusive supplier of Lucent's requirements for
various access products, such as the Acculink Access Controller, for resale
through June 2001. Sales of Acculink Access Controller accounted for greater
than 10% of our total revenues during each of 1997, 1998 and 1999. Our revenues
would be adversely affected if Premisys fails to meet its obligations under the
agreement or if Lucent or AT&T were to substantially reduce or discontinue
their orders of Acculink Access Controller.
WE DEPEND ON SOLE AND SINGLE SOURCE SUPPLIERS WHICH EXPOSES US TO POTENTIAL
SUPPLY INTERRUPTION
We currently purchase a number of important parts, such as framers,
semiconductors and embedded communications processors, from sole source vendors
for which alternative sources are not currently available. Delays or
interruptions in the supply of these components result in delays or reductions
in product shipments. The purchase of these components from outside suppliers
on a sole source basis subjects us to risks, including the continued
availability of supplies, price increases and potential quality assurance
problems. We currently purchase key components for which there are currently no
immediate substitutes available from approximately 53 vendors. All of these
components are critical to the production of our products. While alternative
suppliers may be available to us, we must first identify these suppliers and
qualify them. We cannot be certain that any such suppliers will meet our
required qualifications or that we will be able to identify alternative
suppliers in a timely fashion, if at all. We may not be able to obtain
sufficient quantities of these components on the same or substantially the same
terms. Consolidations involving suppliers could further reduce the number of
alternatives for us and affect the cost of such supplies. An increase in the
cost of such supplies could make our products less competitive with products
which do not incorporate such components. Lower margins or less competitive
product pricing could materially and adversely affect our business, financial
condition and results of operation.
OUR SALES CYCLE IS TYPICALLY LONG AND UNPREDICTABLE
Our business is subject to lengthy sales cycles. As a result, we may
not recognize revenues from the sale of our products for long periods of time.
Delays in product testing or approval, or cancellations of orders by customers,
especially our NSP customers, could materially and adversely affect our
revenues. On average, our sales cycle ranges from six to nine months. Sales of
our products require a substantial commitment of capital and time from our
customers, many of whom have lengthy internal procedures for approving large
capital expenditures and lengthy testing and decision-making processes. Before
our NSP customers purchase products from us, they must first make a decision to
standardize their service on a particular product, which involves extensive
testing. Our sales cycle may be slowed further, or affected by, budgetary
constraints and purchasing requirements of our customers, all of which are
beyond our control. Moreover, sales of our products often require significant
training of both our customers and end users before the decision to purchase.
As a result, we may expend significant resources pursuing potential sales
opportunities that will not be consummated.
BECAUSE OF OUR LONG PRODUCT DEVELOPMENT PROCESS, WE INCUR SUBSTANTIAL EXPENSES
BEFORE WE EARN ASSOCIATED REVENUES
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In order to remain competitive, we invest significant resources toward
research and development of our current and potential products. Development
costs and expenses are incurred before we generate any revenues from sales of
products resulting from these efforts. Our current or future customer base may
not purchase any products resulting from our current or future development
efforts.
A FAILURE BY US TO PROTECT OUR TECHNOLOGY MAY ADVERSELY AFFECT OUR ABILITY TO
COMPETE
Our success and ability to compete is substantially dependent upon our
technology. A failure to protect our technology could result in competitors
offering similar products potentially resulting in a loss of competitive
advantage and decreased revenues. We rely on a combination of patent,
trademark, copyright and trade secret laws and non-disclosure agreements to
protect such technology. Currently, we hold over 165 United States patents and
have over 110 United States patent applications pending. In addition, we hold
certain corresponding foreign patents and have certain corresponding foreign
patent applications pending. However, we cannot be certain that patents will be
issued with respect to any of our pending or future patent applications. In
addition, we do not know whether any of our issued patents will be upheld as
valid or that they will prevent the development of competitive products.
We seek to protect our intellectual property rights by limiting access
to the distribution of our software, documentation and other proprietary
information. If any third parties infringe our proprietary rights, such
infringement could materially and adversely affect our competitive positions.
As with our issued patents, we cannot be certain that the steps we have taken
to protect our intellectual property will adequately prevent the
misappropriation of any of our technology. Our competitors may independently
develop technologies that are substantially equivalent or superior to our
technologies. In addition, the laws of certain foreign countries do not protect
our proprietary rights to the same extent as do the laws of the United States.
Third parties may attempt to copy or reverse engineer aspects of our products
or to obtain and use information that we regard as proprietary. Accordingly, we
may not be able to protect our proprietary rights against unauthorized third
party copying or use.
We are also subject to the risk of adverse claims and litigation
alleging infringement of the intellectual property rights of others. These
claims may require us to enter into license arrangements or may result in
protracted and costly litigation, regardless of the merits of such claims. We
may not be able to obtain necessary licenses on commercially reasonable terms,
if at all. From time to time, we receive and have received letters from others
requesting licenses or indicating that our products may require a license.
These letters are not uncommon in the industry, and these letters are dealt
with according to normal business practices. For example, in March and July
1999, we received a letter from a third party patent owner alleging
infringement by us of patents allegedly relating to equipment, including bar
code scanners and circuit board manufacturing equipment, which we use in our
manufacturing processes, and to integrated circuit microchips that we buy and
incorporate into our products. We purchase this equipment and the microchips
from vendors, who we believe may have an obligation to indemnify us in the
event that the equipment and microchips infringe the patents. The patents
referenced in this letter are also the basis for several infringement lawsuits
commenced by the patent owner to which we are not a party. In some of those
claims, the defendants are in the process of challenging the validity of the
patents. No claim has been asserted beyond this letter, but we cannot assure
you that the third party will not commence an infringement action against us.
We are in the process of investigating the allegations. If an infringement
claim is brought against us, we cannot assure you that we would prevail and any
adverse outcome could require us, among other things, to pay royalties to the
third party patent owner. Based on our investigation to date, we presently do
not believe that any such adverse outcome would have a material adverse impact
on our operations. However, we cannot assure you that future developments will
not affect this conclusion or assure you that we will not receive other letters
alleging infringement in the future.
IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL AND A SKILLED WORKFORCE,
WE MAY NOT BE ABLE TO SUSTAIN OR GROW OUR BUSINESS
Our success depends to a significant degree upon the continued
contributions of the principal members of our sales, engineering and management
personnel, many of whom would be difficult to replace. The loss of such
personnel could materially and adversely affect our business, financial
condition and results of operations. Specifically, we believe that our future
success is highly dependent on our senior management, and in particular on
Andrew May, President and Chief Executive Officer. Except for agreements with
Messrs. May, Murphy and
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Slattery, we do not have employment contracts with our executive officers. In
any event, employment contracts would not prevent key personnel from
terminating their employment with us.
We believe that our future success will also depend highly upon our
ability to attract and retain highly skilled customer support and product
development personnel. The market for qualified personnel in the
telecommunications industry is highly competitive, and we frequently experience
difficulty in recruiting qualified personnel. Recruiting qualified personnel is
an intensely competitive and time-consuming process.
OUR RELIANCE ON INTERNATIONAL SALES MAY MAKE US SUSCEPTIBLE TO GLOBAL ECONOMIC
FACTORS, FOREIGN TAX LAW ISSUES AND CURRENCY FLUCTUATIONS
We currently have 9 sales offices and subsidiaries in North America,
Africa, Europe and Asia through which we market and sell our products. Our
international operations subject us to risks to which we would not otherwise be
exposed. These risks may cause our results of operations to fluctuate. For
example, sales to customers outside of the United States accounted for
approximately 30% of revenues in 1997, 20% of revenues in 1998 and 18% of
revenues in 1999 respectively. This decrease was primarily due to the decline in
sales of our older narrowband products and economic instability in Asia. Our
international operations subject us to risks to which we would not otherwise be
exposed, such as:
- - impact of recessions in economies outside of the United States;
- - currency exchange rate fluctuations;
- - political and economic instability;
- - policy, legal, regulatory or other changes affecting the
telecommunications and data communications markets;
- - uncertain intellectual property rights protection;
- - potential adverse tax consequences;
- - change in tariffs; and
- - difficulties in accounts receivable collection.
OUR FAILURE TO COMPLY WITH REGULATIONS COULD AFFECT OUR PRODUCT OFFERINGS
We are subject to a significant number of communications regulations
and standards, some of which are evolving as new technologies are deployed and
due to ongoing judicial and administrative proceedings. New regulations or new
interpretations of existing laws or regulations, or compliance with additional
existing regulations due to changes in the nature of our products could result
in significant additional cost to us. Moreover, failure of our products to
comply, or delays in compliance, with the various existing and evolving
industry regulations and standards could delay the introduction of our
products. Our products may be required to comply with various regulations,
including those promulgated by the FCC, state public utilities commissions and
various foreign governments. Our products must comply with the Communications
Act of 1934 and the Telecommunication Act of 1996. In the United States, in
addition to complying with FCC regulations, our products are required to meet
certain safety requirements. For example, NSPs may require that our products
that are located in their facilities be network equipment building standard
certified before they purchase the products from us. Outside of the United
States, our products are subject to the regulatory requirements of each country
in which the products are manufactured or sold. These requirements vary widely,
and we may be unable to obtain on a timely basis, if at all, necessary
approvals for the manufacture, marketing and sale of our products.
Enactment by federal, state or foreign governments of new laws or
regulations, changes in the interpretation of existing laws or regulations or a
reversal of the trend toward deregulation in the telecommunication
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industry could materially and adversely affect our customers, and thereby
materially and adversely affect our business, financial condition and results
of operations.
CHANGES TO REGULATIONS AFFECTING THE TELECOMMUNICATIONS INDUSTRY COULD REDUCE
DEMAND FOR OUR PRODUCTS
If our NSP customers are required to comply with new laws, new
regulations or new interpretations of existing laws or regulations, or if they
are required to comply with additional existing regulations due to changes in
the nature of their services, those changes could materially and adversely
affect the market for our products. A large percentage of our customers are
NSPs whose voice services, and many of their other network services, must
comply with the Communications Act of 1934, the Telecommunications Act of 1996
and regulations prescribed by the FCC. Furthermore, most of our NSP customers'
voice services are subject to regulation by state public utilities commissions.
Some of our NSP customers are subject to foreign government regulation. Many of
these federal, state and foreign regulations continue to evolve due to ongoing
judicial and administrative proceedings, particularly those federal regulations
designed to define rights and obligations under the Telecommunications Act of
1996. From time to time, the FCC or regulatory bodies may propose legislation
or adopt rules, regulations or polices that could affect our business, either
beneficially or adversely, such as by increasing competition or affecting the
cost of our operations. We cannot predict the impact of future regulatory
actions on our operations.
COMPLIANCE WITH EVOLVING INDUSTRY STANDARDS COULD ADVERSELY AFFECT OUR PRODUCT
OFFERINGS
Many of our products must comply with equipment standards adopted by
national and international standards bodies. If we are required, or deem it
otherwise necessary or advisable, to comply with new standards or with
additional existing standards due to changes in standards, we may have to
modify our current or future products. The costs of any modification could
materially and adversely affect our business, financial condition and results
of operations. Compliance with these standards is important because it often
enhances the marketability of our products. Many of those standards are
influenced by industry committees that develop draft standards and technical
reports. These industry committees often include us, our customers, and our
competitors and their customers.
WE RELY HEAVILY ON DISTRIBUTORS AND RESELLERS
We estimate that in 1999 over 55% of our sales were made through
distributors and resellers. We often rely on distributors and resellers to
provide installation, training and customer support to the ultimate end users
of our products. As a result, our success depends on the continued sales and
customer support efforts of our network of distributors and resellers. Any
reduction, delay or loss of orders from our significant distributors or
resellers could materially and adversely affect our revenues.
OUR ABILITY TO SUSTAIN OR GROW OUR BUSINESS MAY BE HARMED IF WE ARE UNABLE TO
PROVIDE ADEQUATE CUSTOMER SUPPORT
Our ability to continue to grow our company and to retain current and
future customers depends in part upon the quality of our customer support
operations. A failure to offer adequate customer support could materially and
adversely affect our reputation or cause demand for our products to decline.
Our customers generally require significant support and training prior to the
installation and deployment of our products. Providing adequate levels of
support to our customers requires significant expenditures of resources and
capital. As the market for high-speed access devices grows and as the
technology for these devices continues to evolve, we will need to augment and
improve upon our customer support operations.
WE MAY NOT BE ABLE TO FINANCE OUR GROWTH AND CAPITAL REQUIREMENTS
Substantial working capital is required in order to fund and continue
to build our business. If we fail to do so, we will not be able to remain
competitive or continue to meet the increasing demands for our products.
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We may also need to spend significant amounts of cash to fund operating
losses and increases in expenses, take advantage of opportunities or respond to
developments or competitive pressures. We believe that the proceeds from our
initial public offering in July 1999 and our secondary offering in September
1999, together with our existing capital resources and our revolving line of
credit facility with BankAmerica NT&SA, will allow us to meet our capital
requirements for at least the next 18 months. However, our capital requirements
depend on several factors, including the rate of market acceptance of our
products, the ability to expand our client base, the growth of our sales and
marketing efforts and other factors. If capital requirements vary materially
from those currently planned, we may require additional financing sooner than
anticipated. We cannot be certain that additional financing will be available to
us when needed or that such financing can be obtained on terms favorable to us.
If adequate funds are not available or are not available on acceptable terms, we
may be unable to develop or enhance our services, take advantage of future
opportunities or respond to competitive pressures.
WE RELY UPON DISTRIBUTIONS, DIVIDENDS AND LOANS FROM OUR SUBSIDIARIES IN ORDER
TO MEET OUR OBLIGATIONS AND COMMITMENTS
As a holding company, we have no operations of our own. If our
subsidiaries are unable to pay dividends or make loans or other distributions
to us, we may not be able to meet obligations and debts that we incur, and the
market price of our common stock could be adversely affected. In connection
with a line of credit facility, our operating subsidiary Paradyne Corporation
and its Canadian subsidiary are restricted from paying dividends and making
loans and other distributions.
THE YEAR 2000 PROBLEM MAY SEVERELY DISRUPT OUR BUSINESS, FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Despite the passing of January 1, 2000, the year 2000 problem
continues to create a risk for us. This risk exists primarily in three areas:
- - systems we use to run our business;
- - systems used by our service providers, distributors and suppliers; and
- - the potential for failures of our products, particularly our central
office-based systems, due to Year 2000 problems associated with
products manufactured by other equipment vendors used in conjunction
with our products.
A disruption in the operations of parties with whom we interact could
materially and adversely affect our business, financial condition and results
of operations.
We have developed a comprehensive multi-year plan to ensure that our
internal computer software and hardware systems will be Year 2000 compliant in
the year 2000 and beyond. Depending on the systems affected, this plan could
include accelerated replacement of affected equipment or software, increased
work hours for our personnel or use of contract personnel to correct on an
accelerated schedule any Year 2000 problems which may arise, the provision of
manual workarounds for information systems, and other similar approaches. If we
are required to implement any of these contingency plans, such plans may
materially and adversely affect our business, financial condition and results of
operations.
IF OUR PRODUCTS CONTAIN DEFECTS, WE MAY BE SUBJECT TO SIGNIFICANT LIABILITY
CLAIMS FROM OUR CUSTOMERS AND THE END-USERS OF OUR PRODUCTS AND INCUR
SIGNIFICANT UNEXPECTED EXPENSES AND LOST SALES
Our products are complex and, despite extensive testing, may therefore
contain undetected errors or failures. If this happens, we may experience delay
in or loss of market acceptance and sales, product returns, diversion of
research and development resources, injury to our reputation or increased
service and warranty costs. We also have exposure to significant liability
claims with respect to our customers because our products are designed to
provide critical communications services. Although we attempt to limit such
exposure through product
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liability insurance and through contractual limitations in our customer
agreements, such precautions may not cover all potential claims resulting from
a defect in one of our products.
MANAGEMENT AND OUR SINGLE LARGEST STOCKHOLDER MAY LIMIT YOUR ABILITY TO
INFLUENCE THE OUTCOME OF DIRECTOR ELECTIONS AND OTHER STOCKHOLDER MATTERS
Our executive officers, directors and principal stockholders and their
affiliates beneficially owned approximately 48% of our outstanding shares of
common stock, as of February 29, 2000. As a result, these stockholders, if
acting together, would be able to effectively control substantially all matters
requiring approval by our stockholders.
Entities associated with Texas Pacific Group owned approximately 40%
of our outstanding shares of common stock as of February 29, 2000 and may be
able to exercise control over Paradyne, subject to the fiduciary duties of its
representatives on the board of directors under Delaware law. The interests of
Texas Pacific Group may not always coincide with the interests of other
stockholders. Texas Pacific Group, through its representatives on the board of
directors, could cause us to enter into transactions or agreements which we
would not otherwise consider absent Texas Pacific Group's influence.
OUR STOCK PRICE MAY BE VOLATILE AND YOU MAY NOT BE ABLE TO RESELL SHARES AT OR
ABOVE THE OFFERING PRICE
Prior to the effective date of our initial public offering on July 15,
1999, there was no public market for our common stock. The trading price of our
common stock could be subject to wide fluctuations in response to various
factors, some of which are beyond our control, such as:
- - actual or anticipated variations in quarterly results of operations;
- - changes in intellectual property rights of Paradyne or our competitors;
- - announcements of technological innovations;
- - the introduction of new products or changes in product pricing by
Paradyne or our competitors;
- - changes in financial estimates by securities analysts;
- - announcements of significant acquisitions, strategic partnerships,
joint ventures or capital commitments by us or our competitors; and
- - additions or departures of key personnel.
A FAILURE TO MANAGE OUR GROWTH COULD ADVERSELY AFFECT OUR BUSINESS
We have experienced expansions and contractions of our operations in
the past. If we are unable to manage our growth effectively, our future
profitability could be adversely affected. We anticipate that expansion of our
operations will be required to address the potential growth in our client base
and the opportunities in the broadband access market. Our current expansion is
placing a significant strain on our managerial, operational and financial
resources. We may not have adequate resources to support our future operations.
WE MAY ENGAGE IN ACQUISITIONS, AND WE MAY BE UNABLE TO SUCCESSFULLY INTEGRATE
ANY NEW OPERATIONS, TECHNOLOGIES, PRODUCTS OR PERSONNEL
Recently, the telecommunications industry has experienced substantial
mergers and acquisitions activity. As part of our ongoing corporate development
activities, we will, on a regular basis, engage in discussions with third
parties concerning potential acquisitions of product lines, technologies and
businesses. In the event that such
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an acquisition does occur, because of the small size of our management team, we
may be particularly susceptible to risks associated with the assimilation of
operations, technologies, products and personnel and the diversion of
management's attention from other business concerns. Moreover, we may not be
able to identify suitable acquisition candidates or other strategic
opportunities, and even if we do identify them, we may not be able to
successfully consummate any transaction.
SHOULD WE SELL A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK IN THE PUBLIC
MARKET, THE PRICE OF OUR COMMON STOCK COULD FALL
Sales of a substantial number of shares of our common stock in the
public market could cause the market price of our common stock to decline and
could impair our ability to raise additional capital through the sale of equity
securities. As of February 29, 2000, we had approximately 31,325,382 shares of
common stock outstanding, of which over 99% are freely transferable without
restriction or registration under the Securities Act, unless such shares are
held by our affiliates, as that term is defined in Rule 144 under the
Securities Act. Restricted shares held by non-affiliates will be eligible for
sale under Rule 144(k) without volume and manner of sale restrictions. In
addition, we have filed a registration statement on Form S-8 with the
Securities and Exchange Commission covering the 7,250,000 shares of common
stock reserved for issuance under our 1996 Equity Incentive Plan, 1999 Employee
Stock Purchase Plan and 1999 Non-Employee Directors' Stock Option Plan. On
March 22, 2000, our Board of Directors approved an amendment to our 1996 Equity
Incentive Plan to increase the number of shares available for issuance under
this plan from 6,000,000 shares to 11,000,000 shares. Subject to stockholder
approval of this amendment at our annual meeting to be held on May 25, 2000, we
currently intend to grant options for a substantial portion of the increase to
our officers and employees. Certain of the principal shareholders have indicated
to us their intention to vote their approval of this amendment to our 1996
Equity Incentive Plan.
OUR CORPORATE CHARTER AND BYLAWS MAY DISCOURAGE TAKE-OVER ATTEMPTS AND DEPRESS
THE MARKET PRICE OF OUR STOCK
Provisions in our restated certificate of incorporation and bylaws may
have the effect of delaying or preventing a change of control or changes in our
management. These provisions include:
- - the right of the board of directors to elect a director to fill a
vacancy created by the expansion of the board of directors;
- - the ability of the board of directors to alter our bylaws without
obtaining stockholder approval;
- - the requirement that at least 50% of the outstanding shares of common
stock are needed to call a special meeting of stockholders;
- - the division of the board of directors into three classes, with each
class serving staggered three-year terms; and
- - the requirement that all actions by stockholders must be effected at a
duly called meeting of the stockholders and may not be effected by a
consent in writing.
These provisions could discourage take-over attempts and could
adversely affect the market price of our common stock. In addition, these
provisions may limit the ability of stockholders to remove our current
management. In addition, our board of directors can issue up to 5,000,000
shares of preferred stock without the approval of the holders of common stock.
Any preferred stock may have rights senior to the common stock. The issuance of
preferred stock could adversely affect the voting power of holders of common
stock and reduce the likelihood that such holders will receive dividend
payments and payments upon liquidation. Such issuance could have the effect of
decreasing the market price of the common stock. The issuance of preferred
stock could also have the effect of delaying, deterring or preventing a change
in control of Paradyne.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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We do not engage in investing in, or trading, market risk sensitive
instruments. We also do not purchase, for investing, hedging, or for purposes
"other than trading", instruments that are likely to expose us to market risk,
whether interest rate, foreign currency exchange, commodity price or equity
price risk, except as noted in the following paragraph. We have not entered
into any forward or futures contracts, purchased any options, or entered into
any interest rate swaps. Additionally, we do not currently engage in foreign
currency hedging transactions to manage exposure for transactions denominated
in currencies other than U.S. dollars.
If we were to borrow from our revolving line of credit facility with
Bank of America NT&SA, we would be exposed to changes in interest rates. We are
also exposed to changes in interest rates from investments in some held-to
maturity securities. Under our current policies, we do not use interest rate
derivative instruments to manage exposure to interest rate changes.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Our consolidated financial statements for each of the fiscal years in
the three-year period ended December 31, 1999, together with the report thereon
of PricewaterhouseCoopers LLP dated January 19, 2000, are included in this
report commencing on page F-1 and are listed under Part IV, Item 14 in this
report.
ITEM 9: CHANGES IN & DISAGREEMENTS WITH ACCOUNTANTS
There have been no disagreements with or changes in our certified
public accountants for the fiscal years ended December 31, 1998 and 1999.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
We will provide information that is responsive to this Item relating to
our directors and executive officers under the captions "Proposal - Election of
Directors - Nominees," "--Information Regarding Nominees and Continuing
Directors" and "--Executive Officers" and regarding compliance with Section
16(a) of the Securities Exchange Act of 1934 under the caption "Section 16(a)
Beneficial Ownership Reporting Compliance" (and possibly elsewhere in our
definitive proxy statement) in our definitive proxy statement for the 2000
annual meeting of stockholders to be held on May 25, 2000. All of that
information is incorporated in this Item 10 by reference. We will file our
definitive proxy statement for our 2000 annual meeting of stockholders with the
SEC within 120 days after December 31, 1999.
ITEM 11: EXECUTIVE COMPENSATION
We will provide information that is responsive to this Item relating
to executive compensation under the captions "Proposal 1 - Election of
Directors - Director Compensation," "Executive Compensation," and "Compensation
Committee Interlocks and Insider Participation" (and possibly elsewhere in our
definitive proxy statement) in our definitive Proxy Statement. That information
is incorporated in this Item 11 by reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
We will provide information that is responsive to this Item regarding
ownership of our common stock by specified persons under the caption "Stock
Ownership" (and possibly elsewhere in our definitive proxy statement) in our
definitive Proxy Statement. That information is incorporated in this Item 12 by
reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
We will provide information that is responsive to this Item regarding
certain transactions and business relationships with management, directors and
others under the caption "Certain Transactions" (and possibly elsewhere in our
definitive proxy statement) in our definitive Proxy Statement. That information
is incorporated in this Item 13 by reference.
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PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Financial Statements, Financial Statement Schedules and
Exhibits
1) Financial Statements
<TABLE>
<S> <C>
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets as of December 31, 1998 and 1999 F-2
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999. F-3
Consolidated Statements of Changes in Stockholders' Equity
for the years ended December 31, 1997, 1998 and 1999
F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999 F-5
Notes to Consolidated Financial Statements F-6 to F-21
2) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts S-1
3) Exhibits
See Item 14(c) below.
</TABLE>
(b) Reports on Form 8-K
Paradyne did not file any current reports on Form 8-K for the quarter
ended December 31, 1999.
(c) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C> <C>
3.1(1) -- Amended and Restated Certificate of Incorporation.
3.2(1) -- Amended and Restated Bylaws.
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) -- Specimen Stock Certificate.
10.1(1) -- Amended and Restated 1996 Equity Incentive Plan.
10.2(1) -- Form of Stock Option Agreement pursuant to the 1996 Equity Incentive Plan.
10.3(1) -- Form of Early Exercise Stock Purchase Agreement.
10.4(1) -- 1999 Employee Stock Purchase Plan and related offering documents.
10.5(1) -- 1999 Non-Employee Director's Stock Option Plan.
10.6(1) -- Key Employee Stock Option Plan.
10.7(1) -- Loan and Security Agreement between Paradyne and Bank of America NT&SA, dated July 31,
1996.
10.8(1) -- Amended and Restated Subordinated Revolving Promissory Note between Paradyne and
Paradyne Partners, L.P., dated October 16, 1998.
10.9(1) -- Lease Agreement between Paradyne and Shav Associates, dated October 8, 1996.
10.10(1) -- Sublease Agreement between Paradyne and GlobeSpan Semiconductor, Inc. dated December 10,
1997.
10.11(1) -- Amendment to Sublease Agreement between Paradyne and GlobeSpan Semiconductor, Inc.
dated January 1, 1999.
10.12(1) -- Lease Agreement between Paradyne and Townsend Property Trust Lease, dated June 27, 1997.
10.13(l) -- Key Employee Agreement between Paradyne and Thomas Epley, dated April 1, 1999.
10.14(1) -- Employment Agreement between Paradyne and Andrew May, dated December 3, 1996.
10.15(l) -- Key Employee Agreement between Paradyne and Patrick Murphy, dated August 1, 1996.
10.16(l) -- Key Employee Agreement between Paradyne and James Slattery, dated August 1, 1996.
10.17(l) -- Change in Control Agreement between Paradyne and Sean Belanger.
10.18(l) -- Promissory Note, dated May 5, 1997, by James L. Slattery.
10.19(1) -- Promissory Note, dated March 29, 1999, Sean E. Belanger.
10.20(1) -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.21(1) -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.22(1) -- Promissory Note, dated March 26, 1999, Frank J. Weiner.
10.23(1) -- Promissory Note, dated March 26, 1999, by Frank J. Weiner.
10.24(1) -- Promissory Note, dated April 2, 1999, Frank L. Weiner.
10.25(1) -- Promissory Note, dated Match 27, 1999, Mark Housman.
10.26(1) -- Promissory Note, dated March 31, 1999, Andrew S. May.
10.27(1) -- Promissory Note, dated March 31, 1999, Patrick M. Murphy.
10.28(l) -- Promissory Note, dated April 2, 1999, Patrick M. Murphy.
10.29(l) -- Indemnification Agreement between Paradyne and William Stensrud, dated November 6, 1996.
10.30+(1) -- Supply Agreement between Paradyne and Lucent Technologies, Inc., dated July 31, 1996.
10.31+(1) -- Exclusivity and Amendment Agreement between Paradyne, Lucent Technologies, Inc., and
GlobeSpan Semiconductor, Inc. dated August 6, 1998.
10.32+(1) -- Noncompetition Agreement between Paradyne, Communication Partners, L.P., Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated July 31, 1996.
10.33(l) -- Trademark and Patent Agreement between Paradyne, Lucent Technologies, Inc., and GobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.34(l) -- Tax Matters Agreement between Paradyne, Lucent Technologies, Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.35(l) -- Intellectual Property Agreement between Paradyne, Lucent Technologies. Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.36+(1) -- OEM Agreement between Paradyne and Xylan Corporation, dated March 16, 1999.
10.37+(1) -- Distribution Agreement between Paradyne and Tech Data Corporation, dated September 21,
1993.
10.38+(1) -- OEM Agreement between Paradyne and Premisys Communications, Inc., dated December 4,
1992.
10.39(1) -- Network Management Partners Agreement between Paradyne and Ascend Communications, Inc.,
dated November 3, 1998.
10.40+(1) -- Joint Development and Distribution Agreement between Paradyne and AG Communication
Systems Corporation, dated June 10, 1998.
10 41+(1) -- Marketing & License Agreement between Paradyne and NetScout Systems, Inc., dated
January 26, 1998.
10.42(l) -- Amendment No. 2 to Loan and Security Agreement.
10.43+(1) -- Amendment to Supply Agreement between Paradyne and Lucent Technologies, Inc., dated as of
May 5, 1999.
10.44(2) -- Form of Indemnification Agreement between Paradyne and Messrs. Belanger, Bonderman,
Epley, Geeslin, May, Murphy, Slattery, Stanton, Stensrud, and Van Camp.
10.45(2) -- Promissory Note, dated July 1, 1999, J. Scott Eudy.
10.46(2) -- Promissory Note, dated July 1, 1999, J. Scott Eudy.
10.47 -- Amendment No. 1 to Loan and Security Agreement.
10.48 -- Amendment No. 3 to Loan and Security Agreement.
10.49 -- Amendment No. 4 to Loan and Security Agreement.
10.50 -- Amended Agreement between Paradyne and James L. Slattery.
21 -- List of Subsidiaries of Paradyne Networks, Inc.
23.1 -- Consent of Independent Accountants.
24.1 -- Power of Attorney
27.1 -- Financial Data Schedule for EDGAR filing for SEC use only
</TABLE>
- -------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-76385) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Statement on Form S-1 (No. 333-
86965) or amendments thereto and incorporated herein by reference.
+ Confidential treatment has been granted for certain portions which have been
omitted in the copy of the exhibit filed with the Securities and Exchange
Commission. The omitted information has been filed separately with the
Securities and Exchange Commission pursuant to the application for
confidential treatment.
48
<PAGE> 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Paradyne Networks, Inc.
By: /s/ Andrew S. May
-----------------------------
Andrew S. May
President and
Chief Executive Officer
March 24, 2000
POWER OF ATTORNEY
KNOWN ALL MEN BY THESE PRESENTS that each of the undersigned officers and
directors of Paradyne Networks, Inc. (the "Company"), a Delaware
corporation, for himself and not for one another, does hereby constitute
and appoint Andrew S. May, Patrick M. Murphy and James L. Slattery and each of
them, a true and lawful attorney in his name, place and stead, in any and all
capacities, to sign his name to any and all amendments to this Annual Report on
Form 10-K, and to cause the same (together with all Exhibits thereto) to be
filed with the Securities and Exchange Commission, granting unto said attorneys
and each of them full power and authority to do and perform any act and thing
necessary and proper to be done in the premises, as fully to all intents and
purposes as the undersigned could do if personally present, and each of the
undersigned for himself hereby ratifies and confirms all that said attorneys
or any one of them shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
<S> <C> <C>
/s/ Andrew S. May President, Chief Executive Officer March 24, 2000
- ----------------------- Officer, and Director
Andrew S. May (Principal Executive Officer)
/s/ Patrick M. Murphy Senior Vice President, Chief March 24, 2000
- ----------------------- Financial Officer, and
Patrick M. Murphy Treasurer (Principal Financial
and Accounting Officer)
/s/ Thomas E. Epley Chairman of the Board March 24, 2000
- -----------------------
Thomas E. Epley
</TABLE>
<PAGE> 52
SIGNATURES TITLE DATE
/s/ David Bonderman Director March 24, 2000
----------------------------
David Bonderman
/s/ Keith G. Geeslin Director March 24, 2000
----------------------------
Keith G. Geeslin
/s/ David M. Stanton Director March 24, 2000
----------------------------
David M. Stanton
/s/ William R. Stensrud Director March 24, 2000
----------------------------
William R. Stensrud
/s/ Peter F. Van Camp Director March 24, 2000
----------------------------
Peter F. Van Camp
/s/ Betsy S. Atkins Director March 24, 2000
----------------------------
Betsy S. Atkins
<PAGE> 53
PARADYNE CORP
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE II
000's
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- ------------------------------- ------------- ------------------------------ ------------- ----------
ADDITIONS
------------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COST AND ACCOUNTS END OF
DESCRIPTION PERIOD EXPENSES (1) DEDUCTIONS(2) PERIOD
----- -------- ------ ------------- ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful accounts
Year ended:
5 MONTHS ENDED 12/31/96 4,340 52 1,520 (3,127) 2,785
DECEMBER 31, 1997 2,785 267 5,800 (5,886) 2,966
DECEMBER 31, 1998 2,966 125 12,382 (12,466) 3,007
TOTAL YEAR ENDED DECEMBER 31, 1999 3,007 32 7,470 (6,487) 4,022
</TABLE>
- ---------------
(1) Represents amounts charged to contra revenue accounts for discounts,
rebates, and billing adjustments
(2) Represents amounts charged to accounts receivable reserve accounts for
discounts, rebates, and billing adjustments
S-1
<PAGE> 54
PARADYNE NETWORKS, INC.
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Paradyne Networks, Inc.
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14 (a)(1) and (2) on page 48 present fairly, in all
material respects, the financial position of Paradyne Networks, Inc. and its
subsidiaries (the "Company") at December 31, 1998 and 1999, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Tampa, Florida
January 19, 2000
F-1
<PAGE> 55
PARADYNE NETWORKS, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1999
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,356 $ 62,885
Accounts receivable, less allowance for doubtful accounts of
$3,007 and $4,022, respectively 29,641 29,243
Other receivable from affiliates 721 305
Income tax receivable 4,230 2,010
Inventories 16,997 13,252
Prepaid expenses and other current assets 1,808 3,201
---------- ----------
Total current assets 55,753 110,896
Property, plant and equipment, net 16,103 17,297
Deferred tax assets 1,143 1,473
Other assets 2,064 819
---------- ----------
Total assets $ 75,063 $ 130,485
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 17,205 8,367
Current portion of long-term debt 16,483 434
Deferred tax liability 2,357 2,090
Payroll and benefit related liabilities 6,263 7,887
Other current liabilities 5,063 5,767
---------- ----------
Total current liabilities 47,371 24,545
Long-term debt 353 256
---------- ----------
Total liabilities 47,724 24,801
---------- ----------
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock, par value $0.001; 5,000,000 shares authorized,
none issued or outstanding -- --
Common stock, par value $.001; 60,000,000 shares authorized,
25,668,723 and 30,835,511 shares issued and outstanding as
of December 31, 1998 and 1999, respectively 26 31
Additional paid-in capital 21,058 93,487
Deferred stock compensation -- (1,365)
Retained earnings 6,639 14,528
Notes receivable for common stock (150) (1,274)
Cumulative translation adjustment (234) 277
---------- ----------
Total stockholders' equity 27,339 105,684
---------- ----------
Total liabilities and stockholders' equity $ 75,063 $ 130,485
========== ==========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements
F-2
<PAGE> 56
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Revenues:
Sales $ 177,850 $ 195,153 $ 220,174
Service 3,040 2,256 2,617
Royalty 413 1,392 3,118
----------- ----------- -----------
Total revenues 181,303 198,801 225,909
----------- ----------- -----------
Cost of sales:
Equipment 90,334 107,921 124,125
Service 1,154 620 823
----------- ----------- -----------
Total cost of sales 91,488 108,541 124,948
----------- ----------- -----------
Gross margin 89,815 90,260 100,961
----------- ----------- -----------
Operating expenses:
Research and development 37,339 35,132 36,470
Selling, general and administrative expenses 66,278 55,969 55,938
Amortization of deferred stock compensation -- -- 1,501
Restructuring charges 1,778 984
----------- ----------- -----------
Total operating expenses 105,395 92,085 93,909
----------- ----------- -----------
Operating income (loss) (15,580) (1,825) 7,052
Other (income) expenses:
Interest 7,712 1,711 (405)
Lucent settlement gain (51,183) -- --
Other, net (1,753) 1,191 (3,911)
----------- ----------- -----------
Income (loss) before provision for income taxes 29,644 (4,727) 11,368
Provision (benefit) for income taxes 8,302 (1,082) 3,479
----------- ----------- -----------
Net income (loss) $ 21,342 $ (3,645) $ 7,889
=========== =========== ===========
Basic income (loss) per common share $ 0.84 $ (0.14) $ 0.28
=========== =========== ===========
Weighted average number of common shares outstanding 25,552 25,623 28,435
=========== =========== ===========
Diluted income (loss) per common share $ 0.81 $ (0.14) $ 0.26
=========== =========== ===========
Weighted average number of common shares outstanding 26,291 25,623 30,112
=========== =========== ===========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of these financial statements
F-3
<PAGE> 57
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE
INCOME
(in thousands, except share data or as otherwise noted)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DE- NOTES
COMPRE- FERRED RECEIV- TOTAL
HENSIVE COMMON STOCK ADDITIONAL STOCK RETAINED ABLE STOCK-
INCOME ----------------- PAID-IN COMPEN- EARNINGS FOR HOLDER'S
(LOSS) SHARES AMOUNT CAPITAL SATION (DEFICIT) STOCK OTHER EQUITY
-------- ---------- ------- ---------- ------ -------- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 25,500,000 $ 26 $ 16,930 $(10,814) $(163) $ 5,979
Contribution from Paradyne Partners (Note 4) 3,600 3,600
Proceeds from exercise of stock options
and related tax benefit 92,182 287 (150) 137
Net income $ 21,342 21,342 21,342
Cumulative translation adjustment 179 179 179
Unrealized investment gain 409 409 409
Asset allocation to related party (Note 13) (244) (244)
-------- ---------- -- -------- ------- ------ ------- --- --------
Balance, December 31, 1997 $ 21,930 25,592,182 26 20,817 -- 10,284 (150) 425 31,402
Proceeds from exercise of stock options and
related tax benefit 76,541 241 241
Net loss $ (3,645) (3,645) (3,645)
Cumulative translation adjustment (250) (250) (250)
Unrealized investment loss (409) (409) (409)
-------- ---------- -- -------- ------- ------ ------- --- --------
Balance, December 31, 1998 $ (4,304) 25,668,723 26 21,058 -- 6,639 (150) (234) 27,339
Proceeds from exercise of stock options and
related tax benefit 1,146,780 1 8,056 8,057
Deferred stock compensation 2,866 (2,866) --
Amortization of deferred stock compensation 1,501 1,501
Net income $ 7,889 7,889 7,889
IPO & Secondary Offering 4,020,000 4 61,507 61,511
Notes receivable for stock (1,124) (1,124)
Cumulative translation adjustment 511 511 511
-------- ---------- ---- -------- ------- -------- ------- ----- --------
Balance, December 31, 1999 $ 8,400 30,835,503 $ 31 $ 93,487 $(1,365) $ 14,528 $(1,274) $ 277 $105,684
======== ========== ==== ======== ======= ======== ======= ===== ========
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements
F-4
<PAGE> 58
PARADYNE NETWORKS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN CASH FLOWS
(in thousands, except share data or as otherwise noted)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
CASH FLOWS PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Net income (loss) $ 21,342 $ (3,645) $ 7,889
Adjustments to reconcile net income (loss) to cash provided by (used in)
operating activities:
Lucent settlement gain (51,183) -- --
Investment (income) loss ABI (1,668) 1,353 --
Loss on sale of assets 22 232 33
Increase in allowance for bad debts 181 41 1,014
Depreciation and amortization 10,558 5,243 7,575
Deferred income taxes 9,817 (7,978) (597)
(Increase) decrease in assets:
Receivables 15,061 7,384 (616)
Accounts receivable from affiliates 711 798 416
Income tax receivable (536) (3,694) 2,220
Inventories 5,266 (2,176) 3,745
Prepaid expenses and other current assets (543) (97) (1,393)
Other long-term assets 2,564 1,186 633
Increase (decrease) in liabilities:
Accounts payable (7,484) 7,629 (8,838)
Payroll and related liabilities (258) 1,132 1,624
Other current liabilities (4,987) (1,244) 704
--------- --------- ---------
Net cash provided by (used in) operating activities (1,137) 6,164 14,409
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) INVESTING ACTIVITIES:
Capital expenditures (9,636) (6,945) (6,720)
Proceeds from sale of property, plant and equipment 21,218 1,532 26
Proceeds from sale of investment -- 347 --
--------- --------- ---------
Net cash provided by (used in) investing activities 11,582 (5,066) (6,694)
--------- --------- ---------
CASH FLOWS PROVIDED BY (USED IN) FINANCING ACTIVITIES:
Proceeds from debt issued to parent -- 5,000 --
Repayment of debt issued to parent (7,500) (5,000) --
Payment of acquisition costs (377) (625) --
Proceeds from stock 137 241 68,450
Borrowings under (repayment of) bank line of credit, net 4,390 1,139 (16,082)
Borrowings under other debt obligations 6,038 623 445
Repayment of other debt obligations (11,426) (3,110) (510)
--------- --------- ---------
Net cash provided by (used in) financing activities (8,738) (1,732) 52,303
--------- --------- ---------
Effect of foreign exchange rate changes on cash 179 (250) 511
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 1,886 (884) 60,529
Cash and cash equivalents at beginning of year 1,354 3,240 2,356
--------- --------- ---------
Cash and cash equivalents at end of year $ 3,240 $ 2,356 $ 62,885
========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received), net, for:
Interest expense $ 2,658 $ 1,711 $ 869
========= ========= =========
Income taxes $ 471 $ 10,041 $ (2,379)
========= ========= =========
Non-cash transactions:
Investment acquired (written down) in exchange for intellectual property $ 1,668 $ (1,353) $ --
========= ========= =========
Acquisition of installment and affiliate receivables in consideration
for related party note $ (13,735)
=========
Debt forgiveness (Note 4) $ 63,000
=========
Contribution from Paradyne Partners (Note 4) $ 3,600
=========
Asset allocation to related party (Note 13) $ 244
=========
Stock issued for note $ 150 $ 1,124
========= =========
The accompanying Notes to Consolidated Financial Statements are an integral
part of these financial statements
</TABLE>
F-5
<PAGE> 59
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
- ------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
Pursuant to a Purchase Agreement dated June 18, 1996 (the "Purchase
Agreement"), Paradyne Partners, L.P. ("Paradyne Partners") acquired
certain assets and operations of AT&T Paradyne Corporation from Lucent
Technologies Inc. ("Lucent") for cash and seller notes totaling $146.0
million. This transaction was consummated through five direct and indirect
subsidiaries of Paradyne Partners, which included Paradyne Acquisition
Corp. ("PAC") and its wholly owned subsidiary, Paradyne Corporation and
its subsidiaries. The acquisition was accounted for as a purchase. The
purchase price was allocated to the assets acquired and liabilities
assumed based on fair values including long-lived tangible and intangible
assets. Property, plant and equipment, purchased research and development
and the Lucent supply agreement values were based on independent appraised
values.
That portion of the acquired assets and operations of AT&T Paradyne
Corporation that remained with Paradyne Corporation was purchased for
$102.3 million, consisting of a $17.1 million equity investment, $69.3
million in seller notes to Lucent, debt to the Paradyne Partners of $7.5
million and $8.4 million of other acquisition costs.
In 1999, the legal name of PAC was changed to Paradyne Networks, Inc (the
"Company"). The accompanying financial statements reflect the consolidated
historical financial position, results of operations and cash flows of the
Company, Paradyne Corporation and its wholly owned subsidiaries. Also, see
Note 13 for discussion of related party transactions. Additionally, in
1999 Paradyne Partners was renamed Communication Partners, L.P.
("Communication Partners").
The Company is a leading developer, manufacturer and distributor of
broadband and narrowband network access products for network service
providers and business customers. The Company offers solutions that enable
business class, service level managed, high-speed connectivity over the
existing telephone network infrastructure.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounting principles and practices used in the
preparation of the accompanying consolidated financial statements are
summarized below:
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
the Company and its wholly owned subsidiaries: Paradyne Corporation;
Paradyne Canada LTD; Paradyne Japan Corporation; Paradyne International
Ltd.; Paradyne Worldwide Corp. (formerly Paradyne Far East Corporation);
Ark Electronic Products Inc.; Paradyne GmbH; and Paradyne International
Sales Ltd. Intercompany accounts and transactions have been eliminated in
consolidation.
REVENUE RECOGNITION
Revenue from equipment sales is generally recognized at the date of
shipment. Revenue from services, which consists mainly of repair of
out-of-warranty products, is recognized when the services are performed
and all substantial contractual obligations have been satisfied. Provision
is made currently for estimated product returns. Royalty revenue is
recognized when the Company has completed delivery of technical
specifications and performed substantially all required services under the
related agreement. See discussion of product warranty below.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period presented. Actual results could differ from
those estimates.
F-6
<PAGE> 60
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
- ------------------------------------------------------------------------------
The markets for the Company's products are characterized by intense
competition, rapid technological development and frequent new product
introductions, all of which could impact the future value of the Company's
inventory and certain other assets.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid instruments purchased with an
original maturity of three months or less to be cash equivalents.
CONCENTRATION OF CREDIT RISK
The Company sells products to value added distributors and other customers
and extends credit based on an evaluation of the customer's financial
condition, generally without requiring collateral. Exposure to losses on
receivables is principally dependent on each customer's financial
condition. The Company monitors its exposure for credit losses and
maintains allowances for anticipated losses. Sales to two customers were
approximately 34% and 12%, 35% and 17%, and 27% and 25% of total revenues,
respectively, for the years ended December 31, 1997, 1998 and 1999.
Purchases from two vendors were approximately 23% and 18% of total
purchases for the year ended December 31, 1997, purchases from one vendor
were approximately 15% of total purchases for the year ended December 31,
1998 and purchases from two vendors were approximately 19% and 11% of
total purchases for the year ended December 31, 1999.
International sales accounted for 30%, 20% and 18% of total revenue during
the years ended December 31, 1997, 1998 and 1999, respectively. Following
is a summary of domestic and international revenues and long-lived assets
for the years ended and as of December 31, 1997, 1998 and 1999:
<TABLE>
<CAPTION>
REVENUES (A)
YEAR ENDED DECEMBER 31,
GEOGRAPHIC INFORMATION 1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States $126,802 $158,593 $185,842
Canada 29,082 26,224 25,107
Japan 9,790 3,279 2,910
Other foreign countries 15,629 10,705 12,050
-------- -------- --------
Total $181,303 $198,801 $225,909
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
LONG-LIVED ASSETS
DECEMBER 31,
GEOGRAPHIC INFORMATION 1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
United States $ 20,105 $ 17,867 $ 18,824
Canada 887 511 511
Japan 922 798 --
Other foreign countries 284 134 254
-------- -------- --------
Total $ 22,198 $ 19,310 $ 19,589
======== ======== ========
</TABLE>
- -----------------
(a) Revenues are attributed to countries based on location of customer.
F-7
<PAGE> 61
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
- ------------------------------------------------------------------------------
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments, which includes
cash and cash equivalents, receivables, accounts payable, accrued expenses
and debt, approximates fair value due to the short maturities of those
instruments.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost includes
material, labor and manufacturing overhead. Cost is determined on a
first-in, first-out basis.
INTANGIBLE ASSET
Intangible asset, which consists of a contract with Premisys Communication
for exclusive distribution rights, is included in other assets (see Note
7). This contract is amortized on a straight-line basis over the term of
the agreement of approximately four years. See Note 4 related to favorable
supply contract with Lucent, which was renegotiated. The original contract
value was based on estimated cash flows.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated
depreciation. Leasehold improvements are amortized on a straight-line
basis over the period of the lease or the estimated service lives of the
improvements, whichever is shorter. Depreciation expense includes the
amortization of capital lease assets.
Estimated useful lives are:
<TABLE>
<S> <C>
Leasehold improvements 5-10 years
Office furniture and fixtures 4-10 years
Machinery and equipment 3-7 years
</TABLE>
Expenditures for renewals and improvements that significantly add to
productive capacity or extend the useful life of an asset are capitalized.
Expenditures for maintenance and repairs are charged to operations when
incurred. When assets are sold or retired, the cost of the asset and the
related accumulated depreciation are eliminated from the accounts and any
gain or loss is recognized at such time.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company evaluates the recoverability of its long-lived assets whenever
adverse events or changes in business climate indicate that the expected
undiscounted future cash flows from the related asset may be less than
previously anticipated. If the net book value of the related asset exceeds
the undiscounted future cash flows of the asset, the carrying amount would
be reduced to the present value of its expected future cash flows and an
impairment loss would be recognized in accordance with Statement of
Financial Accounting Standards (SFAS) No. 121. As of December 31, 1998 and
1999, management does not believe that an impairment reserve is required.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are expensed as incurred.
PRODUCT WARRANTY
The Company generally provides a return to factory warranty for a period
of two years from the date of sale. A current charge to income is recorded
at the time of sale to reflect the amount the Company estimates will be
needed to cover future warranty obligations for products sold during the
year. The accrued liability for warranty costs is included in the caption
"other current liabilities" in the accompanying consolidated balance sheet
F-8
<PAGE> 62
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
- ------------------------------------------------------------------------------
INCOME TAXES
The Company accounts for income taxes under the provisions of SFAS No.
109, "Accounting for Income Taxes," which requires use of the asset and
liability method of accounting for deferred income taxes.
EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per share is computed by dividing income available
to common stockholders by the weighted average number of common shares
outstanding during the year. Diluted earnings per share assumes the
exercise of stock options for which market price exceeds exercise price,
less shares assumed purchased by the Company with related proceeds and
associated tax benefits.
Options to purchase 1,132,150 shares of common stock ranging from $25.69 -
$47.00 per share were outstanding during 1999 but were not included in the
computation of diluted earnings per share because the options' exercise
price was greater than the average market price of the common shares. All
such options were still outstanding as of December 31, 1999.
Options are not included in the 1998 calculation of diluted loss per share
due to their antidilutive effect.
<TABLE>
<CAPTION>
Year Ended December 31, 1997
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 21,342 25,552 $ 0.84
EFFECT OF DILUTIVE SECURITIES
Incremental shares for employee options $ -- 739 (0.03)
DILUTED EPS
Income available to stockholders & assumed conversions $ 21,342 26,291 $ 0.81
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31, 1999
-------------------------------------------------------
Income Shares Per-Share
(Numerator) (Denominator) Amount
------------- ------------- -------------
<S> <C> <C> <C>
BASIC EPS
Income available to common stockholders $ 7,889 28,435 $ 0.28
EFFECT OF DILUTIVE SECURITIES
Incremental shares for employee options $ -- 1,677 (0.02)
DILUTED EPS
Income available to stockholders & assumed conversions $ 7,889 30,112 $ 0.26
</TABLE>
F-9
<PAGE> 63
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except per share data or as otherwise noted)
- ------------------------------------------------------------------------------
In June 1999 Paradyne Networks, Inc. filed an amendment to its Certificate
of Incorporation providing that effective upon the Initial Public Offering
every two outstanding shares of the Company's common stock shall be
combined into one share of common stock. The amendment authorized
60,000,000 common shares at a par value of $.001. All earnings per share
data have been adjusted to reflect this reverse split.
FOREIGN CURRENCY
The local currency is the functional currency of each of the foreign
subsidiaries. Assets and liabilities of the Company's foreign subsidiaries
are translated using fiscal year-end exchange rates, and revenue and
expenses are translated using average exchange rates prevailing during the
year. The effects of translating foreign subsidiaries' financial statements
are recorded as a separate component of stockholders' equity. In addition,
included in other (income) expense are realized foreign currency exchange
losses of $596 for 1997, realized foreign currency gains of $181 for 1998
and realized foreign currency losses of $421 for 1999.
3. RESTRUCTURING CHARGES
The Company recorded a restructuring charge of $1.8 million related to
staff reductions in the U.S. operations in November 1997. Termination
charges related to approximately 93 employees spread throughout all major
functions within the Company. Staff reductions were necessary because the
Company had significantly improved operating efficiencies with its
investment in new systems and processes, as well as changing the
composition of our workforce to update the availability of strategic
skills.
In 1998, the Company recorded a restructuring charge of $984. This charge
related to the change in the Company's model for operating within certain
international operations. The Company now operates through a system of
distributors with branch operation support in most foreign locations. In
this restructuring, approximately 25 employees were terminated from
employment. In addition, charges were incurred to exit from leased
facilities in international locations.
During 1997, 1998 and 1999, the Company paid approximately $957, $1.4
million and $203, respectively, related to restructurings. The remaining
$185 accrued as of year-end, which is expected to be paid during 2000, is
related to the international restructuring.
4. AMENDMENT TO LUCENT SUPPLY AGREEMENT
At July 31, 1996, Lucent delivered, as a condition to the closing
specified in Note 1, a four-year Volume Purchase Letter ("VPL") whereby
Lucent agreed to purchase a baseline level of certain products or pay a
penalty. At December 31, 1997 Lucent had not achieved the baseline
commitment under the VPL and, therefore, was subject to certain
take-or-pay provisions. In August 1998, the Company, GlobeSpan
Semiconductor Inc., a subsidiary of Communication Partners ("GlobeSpan")
and Lucent terminated the VPL including the elimination of all existing
and future minimum purchase requirements under a revised Exclusivity and
Amendment Agreement.
F-10
<PAGE> 64
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
As a result of the Exclusivity and Amendment Agreement, the Company
received $8.2 million in cash and $63.0 million of the outstanding note
payable to Lucent was forgiven. The Company also paid Lucent the
remaining $2.7 million outstanding under the existing terms of the note
payable. In addition, GlobeSpan agreed to amend the warrant originally
granted to Lucent at the time of Communication Partners' acquisition of
GlobeSpan to acquire 1,500,000 shares of GlobeSpan by extending the
warrant term by three years, which would have expired upon repayment of
the seller notes. Additionally, Lucent and the Company agreed that the
Company will be Lucent's exclusive provider for certain access products
for resale through June 30, 2001.
The contract renegotiation and resolution has been reflected in the
accompanying consolidated financial statements at December 31, 1997 and
resulted in a pretax gain of approximately $51.2 million and a
contribution of capital by Paradyne Partners of $3.6 million reflecting
the estimated fair value of the extension of the GlobeSpan warrant.
5. INVENTORIES
Inventories are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
<S> <C> <C>
Raw materials $11,064 $10,603
Work-in-process 1,970 1,198
Finished goods 3,963 1,451
------- -------
$16,997 $13,252
======= =======
</TABLE>
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
<S> <C> <C>
Leasehold improvements $ 1,375 $ 1,361
Office furniture and fixtures 2,556 2,539
Machinery and equipment 22,922 28,899
------- -------
26,853 32,799
Less accumulated depreciation (10,750) (15,502)
------- -------
$16,103 $17,297
======= =======
</TABLE>
Depreciation expense amounted to $3.6 million, $4.6 million and $5.5
million for 1997, 1998 and 1999, respectively.
F-11
<PAGE> 65
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data as otherwise noted)
7. OTHER ASSETS
Other assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1998 1999
<S> <C> <C>
Intangible asset, net of accumulated amortization of
$1.5 million and $2.1 million, respectively $ 766 $ 154
Notes receivable, interest at 9.25% 429 339
Security deposits 831 183
Other 38 143
-------- -------
$ 2,064 $ 819
======== =======
</TABLE>
8. OTHER CURRENT LIABILITIES
Other current liabilities consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1998 1999
<S> <C> <C>
Accrued professional fees $ 1,013 $ 851
Accrued product warranty 1,682 1,552
Accrued taxes 611 1,502
Accounts payable to affiliates 7 57
Other 1,750 1,805
------- -------
$ 5,063 $ 5,767
======= =======
</TABLE>
9. INDEBTEDNESS
Indebtedness consists of the following:
F-12
<PAGE> 66
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
<S> <C> <C>
Revolving credit facility, interest at the bank's stated reference
rate plus 0% to 1% (7.75% and 9.5%,
respectively, at December 31, 1998 and 1999),
collateralized by certain assets of the Company,
payable monthly, maturing January $ 16,082 $ --
Capitalized lease obligations, interest ranging from
to 9.5%, maturing at various dates through July 754 690
-------- -----
16,836 690
Less current portion (16,483) (434)
-------- -----
$ 353 $ 256
======== =====
</TABLE>
Scheduled principal repayments on debt for the next five years are as
follows:
2000 - $434; 2001 - $202; 2002 - $54; thereafter - $0.
REVOLVING CREDIT FACILITIES
On July 31, 1996, the Company entered into an agreement (the
"Agreement") with a commercial lending institution to provide a
revolving credit facility in the amount of $45.0 million with
availability subject to a borrowing base formula. In March 1999, the
Company voluntarily reduced the amount available for borrowing under
this revolving credit facility to $35.0 million. The facility provides
for a sub-limit of $5.0 million for letters of credit, of which none
were outstanding at December 31, 1998 or 1999. The Agreement includes a
fee ranging from .357% to .50% of the unused line. Certain assets of
the Company, including accounts receivable, inventories, equipment and
intellectual property rights, are pledged as collateral. The Company is
subject to various non-financial covenants under the terms of the
Agreement. Effective December 31, 1998 and 1999, the Company was in
compliance with or had obtained waivers to the Agreement for such
covenants. On July 21, 1999, $10.4 million of the proceeds from the
Company's July, 1999 initial public offering ("IPO") were used to pay
off the outstanding balance under the line of
F-13
<PAGE> 67
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
credit with Bank of America NT&SA. While this line of credit continues
to be available to the Company, there have been no borrowings under
this line since July 21, 1999.
Additionally, the Agreement restricts the Company with respect to
making dividends.
On January 1, 2000, the Company voluntarily reduced this facility to
$30 million, reduced the unused line fee to 0.25%, and extended the
facility through January 31, 2001.
On August 25, 1997, the Company entered into a subordinated revolving
credit agreement (the "Credit Agreement") with Communication Partners.
The Credit Agreement made available $5.0 million through August 25,
2002. This agreement was amended in October 1998 to make available
$10.0 million. In connection therewith, Communication Partners provided
a limited continuing guarantee of the Agreement. This continuing
limited guarantee was cancelled during 1999. Borrowings under the
Credit Agreement are subordinated to debt under the Agreement and bear
interest at 8% per annum. There were no borrowings under this Credit
Agreement as of December 31, 1998. This facility was terminated by
mutual consent in September 1999.
CAPITAL LEASES
The Company executed several long-term lease agreements for computer
and other equipment. For financial reporting purposes, the leases have
been classified as capital leases; accordingly, assets of approximately
$1.6 million (included in machinery and equipment) and accumulated
depreciation of $817 have been recorded at December 31, 1999.
Future minimum lease payments for assets under capital leases at
December 31, 1999 are as follows:
<TABLE>
<S> <C>
2000 $ 474
2001 214
2002 55
-----
Total minimum lease payments 743
Less amount representing interest 53
-----
Present value of net minimum lease payments 690
Less current portion (434)
-----
Long-term capital lease obligations $ 256
=====
</TABLE>
10. INCOME TAXES
The Company files a consolidated federal income tax return. The
provision (benefit) for income taxes is as follows:
F-14
<PAGE> 68
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1998 1999
<S> <C> <C> <C>
Current:
Foreign $ 37 $ 38 $ --
Federal (1,429) 6,316 3,405
State (123) 542 671
------- --------- --------
(1,515) 6,896 4,076
------- --------- --------
Deferred:
Foreign -- -- --
Federal 9,041 (7,348) (514)
State 776 (630) (83)
------- --------- --------
9,817 (7,978) (597)
------- --------- --------
Income tax provision $ 8,302 $ (1,082) $ 3,479
======= ========= ========
</TABLE>
Deferred tax assets (liabilities) are comprised of the following:
<TABLE>
<CAPTION>
<S> <C> <C>
Property, plant and equipment $(1,951) $(2,090)
Intangibles 117 447
Foreign net operating loss carryforwards 945 765
Other 620 1,026
------- -------
(269) 148
Valuation allowance (945) (765)
------- -------
Net deferred tax liability $(1,214) $ (617)
------- -------
</TABLE>
At December 31, 1999, Paradyne Canada had net operating loss carryforwards
of approximately $1.7 million expiring in 2003. The Company recorded a
valuation allowance at December 31, 1998 and 1999 with respect to the
foreign net operating losses due to the uncertainty of their ultimate
realization.
The provision for income taxes differed from the statutory rate as follows:
<TABLE>
1997 1998 1999
--------------------- -------------------- -------------------
<S> <C> <C> <C> <C> <C> <C>
U.S. Statutory Rate $ 10,375 35.0% $ (1,654) (35.0)% $ 3,864 34.0%
Foreign loss -- -- 523 11.0 -- --
State taxes 746 2.5 (95) (2.0) 387 3.4
Foreign Sales Corporation -- -- -- -- (374) (3.3)
R&D Credit -- -- -- -- (900) (7.9)
Basis adjustments 1,561 5.3 -- -- -- --
Other (277) (1.0) 144 3.1 502 4.4
Valuation allowance (4,103) (13.8) -- -- -- --
-------- ------ -------- ------ ------- -----
Provision for income taxes $ 8,302 28.0% $ (1,082) (22.9)% $ 3,479 30.6%
======== ====== ======== ====== ======= =====
</TABLE>
F-15
<PAGE> 69
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
11. EMPLOYEE BENEFITS
401(K) PLAN
The Company has a 401(k) plan covering substantially all employees of
the Company. Benefits vest based on number of years of service. The
Company's policy is to match two-thirds of an employee's contributions,
up to six percent of an employee's annual salary. Additionally, the
Board of Directors may grant discretionary contributions. Contributions
to the plan were approximately $2.4 million, $2.4 million, and $2.8
million for the years ended December 31, 1997, 1998 and 1999,
respectively.
KEY EMPLOYEE STOCK OPTION PLAN
The Key Employee Stock Option Plan (the "Key Employee Plan") was
adopted in December 1997, and covers employees holding the position of
Vice President or above. Key Employee Plan participants may elect to
defer a portion of their annual compensation in exchange for options to
purchase shares of common or preferred stock of any publicly traded
corporation, shares of the Company's common stock or shares in certain
investment funds. Upon the grant of an option under the Key Employee
Plan, the Company is required to acquire and hold under a trust
arrangement, shares of the stock or investment subject to the option in
a number equal to 75% of the shares subject to option.
STOCK OPTIONS
The Company has a stock option plan (the "1996 Plan") whereby the Board
of Directors may discretionarily reserve common shares for the purpose
of granting to employees (including officers and employee directors) or
to employees of the Company's affiliates, options to purchase common
stock. Nonstatutory stock options, rights to acquire restricted stock
and stock bonuses may be granted to employees (including officers),
directors of and consultants to the Company or its affiliates. Under
the plan, 6,000,000 shares have been reserved related to options
available for grant to employees, directors and consultants through
December 31, 1999. The options generally vest one-fourth each year,
beginning on the first anniversary of the date of grant, and have a
maximum contractual life of 10 years. The exercise price of options
granted under the 1996 Plan is determined by the Board of Directors.
The Company has granted 5,645,303 options to the Company's employees,
directors and consultants, of which 4,476,415 options are outstanding
as of December 31, 1999.
In June 1999, the Board of Directors adopted the 1999 Non-Employee
Director's Stock Option Plan (the "Directors' Plan") and reserved
250,000 shares under the plan to provide for the automatic grant of
options to purchase shares of common stock to non-employee directors of
the Company. Each non-employee director will be granted an initial
grant upon appointment. Annual grants of an additional 5,000 shares
will be made to any of the non-employee directors, subject to
attendance at regularly scheduled meetings of the Board as described in
the plan. The Company has granted 70,000 options to nonemployee
directors of which 20,000 are outstanding at December 31, 1999.
During 1998, the Company granted 47,950 fixed options to purchase
shares of common stock with exercise prices below fair market value. As
a result, $96 of compensation expense will be recognized ratably over
the vesting period of the related options.
During 1998 and 1999, the Company issued options to acquire 331,750
shares of the Company's common stock at a weighted average price of
$5.27 per share, which was less than fair value by $1,829,451, and
which is being amortized ratably over the vesting period. Additionally,
the Company had previously issued options to employees which vested
only in the event of an IPO. As a result of the July 1999 IPO,
F-16
<PAGE> 70
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
77,922 shares of options vested. During 1999, $1,501 of compensation
expense has been included in selling, general and administrative
expenses for all vested stock options issued at less than fair market
value.
A summary of the status of the Company's stock options granted to
employees as of December 31, 1997, 1998, and 1999, respectively, and
changes during the years ended on these dates is presented below:
<TABLE>
<CAPTION>
1997 1998 1999
-------------------------- ----------------------- ----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------------ --------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year $ -- $ -- 3,883,716 $ 2.87 4,028,046 $ 3.17
Granted 4,259,125 2.80 471,900 5.00 1,574,850 24.28
Exercised (92,182) 2.00 (76,541) 2.03 100,164 20.74
Canceled (283,227) 2.08 (251,028) 2.30 126,317 11.16
----------- --------- ---------
Outstanding at end of year 3,883,716 2.87 4,028,047 3.17 4,476,415 10.30
----------- --------- ---------
Exercisable at end of year 949,589 2.81 1,898,226 2.86 1,923,707 3.30
=========== ========= =========
Weighted-average fair value
of all options $ 1.17 $ 1.16 $12.07
</TABLE>
The following table summarizes information about employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
---------------------------------------------------------- -------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING EXERCISE NUMBER EXERCISE
EXERCISE PRICES OF OPTIONS CONTRACTUAL LIFE PRICE OF OPTIONS PRICE
--------------- ---------- ----------------- ---------------- ---------- ----------------
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
2.00 - 5.00 2,801,590 8.28 2.65 1,641,832 2.15
7.50 - 12.00 416,125 7.98 9.94 281,875 10.00
17.00 - 27.50 127,700 8.72 17.08 -- --
28.06 - 47.00 1,131,000 7.76 28.62 -- --
--------- ---------
2.00 - 47.00 4,476,415 8.23 10.30 1,923,707 3.30
========= =========
</TABLE>
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes pricing model with the following
weighted-average assumptions:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Expected term 5.0 years 5.0 years 5.0 years
Expected volatility 0.00% 0.00% 43.46%
Expected dividend yield 0.00% 0.00% 0.00%
Risk-free interest rate 6.60% 6.60% 6.00%
</TABLE>
F-17
<PAGE> 71
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
EMPLOYEE STOCK PURCHASE PLANS
In June 1999, the Board of Directors adopted the 1999 Employee Stock
Purchase Plan (the "Purchase Plan"). Employees may elect to have up to
15% of their earnings withheld. The amounts withheld are used to
purchase shares of common stock, on specified dates determined by the
Board of Directors, at 85% of the lower of the fair market value of the
common stock at the commencement date of each offering period or the
relevant purchase date. As of December 31, 1999, the Company is
authorized to issue up to 1,000,000 shares of common stock to eligible
employees. Each year, the number of shares reserved for issuance under
the Purchase Plan will automatically be increased by 2.0% of the total
number of shares of common stock then outstanding or, if less, by
1,000,000 shares. Under the Purchase Plan, the Company sold 96,624
shares to employees during the year ended December 31, 1999, which had
weighted-average prices of $14.45. The weighted-average value of the
options to purchase stock during 1999 using the Black-Scholes pricing
model was $5.78.
The fair value of each stock option granted under the Purchase Plan is
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1999
<S> <C>
Expected term 1.10 years
Expected volatility 25.18
Expected dividend yield 0.00%
Risk-free interest rate 5.61%
</TABLE>
The Company applies APB Opinion No. 25 and related interpretations for
its stock-based compensation plans. Accordingly, no compensation costs
at the grant dates are recorded for options granted at fair market
value. Had compensation cost for the Company's option plans been
determined based on the fair value at the grant dates as prescribed by
SFAS No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"),
the Company's net income and net income per share on a pro forma basis
would have been (in thousands, except per share data):
<TABLE>
<CAPTION>
1997 1998 1999
<S> <C> <C> <C>
Net income (loss):
As reported $ 21,342 $ (3,645) $ 7,889
----------- ------------ ------------
Pro forma $ 20,971 $ (4,035) 7,567
----------- ------------ ------------
Net income (loss) per share:
As reported $ 0.84 $ (0.14) $ 0.28
----------- ------------ ------------
Pro forma basic $ 0.82 $ (0.16) $ 0.27
----------- ------------ ------------
Pro forma diluted $ 0.80 $ (0.16) $ 0.25
----------- ------------ ------------
</TABLE>
During 1999, various executives of the Company issued full recourse
promissory notes, totaling $1.2 million to the Company in connection
with the purchase of 460,483 shares of common stock. Additionally, in
May 1997, an executive issued a full recourse promissory note in the
amount of $150 in connection with the purchase of 75,000 shares of
common stock. The principal balance of the notes and the related
accrued interest ranging from 4.72% to 6.65% are payable at the earlier
of
F-18
<PAGE> 72
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
the termination of employment or five years from the date of the note
unless otherwise stated. The notes are secured by the shares of common
stock acquired with the notes, and those shares are held in escrow by
the Company. All unvested shares purchased with the notes are subject
to repurchase by the Company if the respective executive terminates
employment before becoming fully vested. The balance of all notes
receivable in connection with the purchase of common stock as of
December 31, 1999 was $1.3 million plus accrued interest.
12. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
The Company is obligated under noncancelable operating leases for
office and warehouse equipment and facilities. The leases expire at
various dates through 2007. Rent expense for the years ended December
31, 1997, 1998 and 1999 approximated $3.0 million, $3.9 million and
$2.9 million, respectively. Minimum required future lease payments
under noncancelable operating leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 4,979
2001 4,810
2002 4,336
2003 3,713
2004 and thereafter 12,439
</TABLE>
The Company leases facilities in Red Bank, N.J. and subleases this
space to GlobeSpan under a noncancelable operating lease. Future
minimum lease payment receivables under the leasing agreement as of
December 31, 1999 are as follows: 2000 - $934; 2001 - $955; 2002 -
$352; 2003 and thereafter - $0 (see Note 13).
SALE/LEASEBACK
In June 1997, the Company sold all of its land and the improvements
thereon at its Largo, Florida facility at approximately net book value,
and at the same time leased back two of the buildings. The primary term
of the lease is for 10 years with annual rents approximating $1.8
million for the first five years and $2.1 million for the remaining
five years. If the buildings are sold within three years of
acquisition, the primary lease term will be 12 years. The Company has
the option to renew the lease for two additional five-year terms on the
same conditions as the current lease. The Company is responsible for
paying any necessary improvements to the property and is responsible
for its proportionate share of most operating costs and taxes on the
property.
SALE OF INSTALLMENT RECEIVABLES
At December 31, 1998 and 1999, sales-type lease receivables sold to
AT&T Capital Corporation with recourse were $886 and $165,
respectively. The ultimate responsibility for the collection of these
receivables is with Paradyne Credit Corp. ("PCC"), a related party.
13. RELATED PARTY TRANSACTIONS
As further discussed in Note 9, the Company executed a revolving
subordinated credit agreement with Communication Partners in fiscal
1997. The Company recorded interest expense of approximately $421, $305
and $0 related to the notes payable to Communication Partners during
1997, 1998 and 1999, respectively.
F-19
<PAGE> 73
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
The Company provides operating, management and other administrative
services for certain subsidiaries of Communication Partners. Total
charges to these entities were approximately $1.1 million, $1.4 million
and $1.6 million for 1997, 1998 and 1999, respectively. This amount is
recorded as a reduction of selling, general and administrative
expenses.
The Company entered into an agreement to allow PCC to purchase
equipment manufactured or sold by the Company at prices substantially
equal to those received by the Company through normal selling channels.
Sales to PCC under this agreement totaled $181, $317 and $3.5 million
for the years ended December 31, 1997, 1998 and 1999, respectively.
Additionally, this agreement provides for the Company to purchase from
PCC equipment that has been returned to PCC at the end of the lease.
These purchases are on terms no more favorable to the Company than
would be obtained in a comparable arm's length transaction. Purchases
for such equipment totaled $0, $141 and $0 for the years ended December
31, 1997, 1998 and 1999, respectively.
In November 1996, the Company entered into a Cooperative Development
Agreement with GlobeSpan. Under this agreement, the Company was granted
an unrestricted license to use GlobeSpan's technical information and
patents. Additionally, the agreement provided for the Company to
purchase GlobeSpan chip sets at prices not to exceed cost plus 15%. The
Company purchased goods approximating $373 and $962 during 1997 and
1998, respectively, under this agreement. Effective July 1998, the
Company revised its pricing arrangement with GlobeSpan such that
GlobeSpan sold products to the Company at preferential prices. In
exchange, GlobeSpan agreed to pay a 1.25% royalty based on net revenues
up to an aggregate amount of $1.5 million. The Company recorded $381 of
royalty revenue related to the agreement during the year ended December
31, 1998. In 1999, the Company and GlobeSpan agreed to terminate the
Cooperative Development Agreement ("Termination Agreement") effective
December 31, 1998. In connection with such termination agreement,
GlobeSpan agreed to pay the Company an aggregate of $1.5 million. Of
this amount, approximately $400 was recorded in 1998 and the remaining
$1.1 million was received in 1999 and included in royalty revenue. In
addition, GlobeSpan and the Company as part of the Termination
Agreement affirmed that the earlier technology license provisions of
the Cooperative Development Agreement were never implemented. In
conjunction with the signing of the Termination Agreement, GlobeSpan
and the Company also entered into a four-year Supply Agreement which
gave the Company favorable pricing and other terms in connection with
the sale by GlobeSpan of products to the Company. During 1999, the
Company purchased $3.6 million from GlobeSpan under this supply
agreement. In addition, under the terms of the Supply Agreement,
GlobeSpan is required to honor the Company's orders for GlobeSpan's
products in quantities at least consistent with the Company's past
ordering practices and must afford the Company at least the same
priority for the Company's orders as GlobeSpan affords its other
similarly situated customers. GlobeSpan also granted the Company a
standard customer immunity under GlobeSpan's intellectual property
rights with respect to any of the Company's products which incorporate
GlobeSpan's products. Prior to May 1999, GlobeSpan participated in a
401(k) plan maintained by the Company. Contributions paid by the
Company on behalf of GlobeSpan approximated $321, $379 and $176 for
1997, 1998 and 1999, respectively. As of May 1999, Globespan no longer
participates in the Company's 401(k) plan. Globespan has reimbursed the
Company for all payments made on their behalf.
In 1997, the Company provided the use of certain assets to GlobeSpan
related to their research activities without material fee. Depreciation
of $244 in 1997 related to those assets has been excluded from the
results of operations and reflected as a distribution of equity to a
related party. Those assets were subsequently sold to GlobeSpan. The
Company sold fixed assets to GlobeSpan for approximately $350
F-20
<PAGE> 74
PARADYNE NETWORKS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share data or as otherwise noted)
in fiscal year 1997 and $1.4 million in fiscal 1998. These assets were
transferred at their approximate net book values, since the transaction
involved entities under common control.
In 1997, the Company received $194 from GlobeSpan as reimbursement for
purchases of product from a supplier on behalf of GlobeSpan. In
December 1997 and September 1998, the Company sold to GlobeSpan certain
chip sets which it held in its inventory in the amounts of $98 and $29,
respectively. GlobeSpan purchased these chip sets for resale to other
customers.
In 1998, the Company subleased additional office space to GlobeSpan
(see Note 12). In connection therewith, GlobeSpan reimbursed
approximately $392 of the Company's moving expenses. Also see Note 4
regarding GlobeSpan warrant extension and Note 9 regarding parent
company debt guaranty.
14. INITIAL PUBLIC OFFERING AND SECONDARY OFFERING
On July 15, 1999, the Company raised $61.5 million, net of direct costs
and underwriters fees in an IPO. On September 28, 1999, the Company and
certain stockholders of the Company sold 20,000 and 5,000,000 shares of
their common stock, respectively, in a secondary offering.
F-21
<PAGE> 75
Paradyne Corp
Valuation and Qualifying Accounts
Schedule II
000's
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
- -------------------------------- ------------ ------------ -------------- -------------- ----------
ADDITIONS
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING OF COST AND ACCOUNTS END OF
DESCRIPTION PERIOD EXPENSES (1) DEDUCTIONS (2) PERIOD
- ------------------------------- ------------ ------------ -------------- -------------- ----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Allowance for Doubtful accounts
Year ended:
5 MONTHS ENDED 12/31/96 4,340 52 1,520 (3,127) 2,785
DECEMBER 31, 1997 2,785 267 5,800 (5,886) 2,966
DECEMBER 31, 1998 2,966 125 12,382 (12,466) 3,007
TOTAL YEAR ENDED DECEMBER 31,
1999 3,007 32 7,470 (6,487) 4,022
</TABLE>
- -----------------
(1) Represents amounts charged to contra revenue accounts for discounts,
rebates, and billing adjustments.
(2) Represents amounts charged to accounts receivable reserve accounts for
discounts, rebates, and billing adjustments.
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C> <C>
3.1(1) -- Amended and Restated Certificate of Incorporation.
3.2(1) -- Amended and Restated Bylaws.
4.1 -- Reference is made to Exhibits 3.1, 3.2 and 3.3.
4.2(1) -- Specimen Stock Certificate.
10.1(1) -- Amended and Restated 1996 Equity Incentive Plan.
10.2(1) -- Form of Stock Option Agreement pursuant to the 1996 Equity Incentive Plan.
10.3(1) -- Form of Early Exercise Stock Purchase Agreement.
10.4(1) -- 1999 Employee Stock Purchase Plan and related offering documents.
10.5(1) -- 1999 Non-Employee Director's Stock Option Plan.
10.6(1) -- Key Employee Stock Option Plan.
10.7(1) -- Loan and Security Agreement between Paradyne and Bank of America NT&SA, dated July 31,
1996.
10.8(1) -- Amended and Restated Subordinated Revolving Promissory Note between Paradyne and
Paradyne Partners, L.P., dated October 16, 1998.
10.9(1) -- Lease Agreement between Paradyne and Shav Associates, dated October 8, 1996.
10.10(1) -- Sublease Agreement between Paradyne and GlobeSpan Semiconductor, Inc. dated December 10,
1997.
10.11(1) -- Amendment to Sublease Agreement between Paradyne and GlobeSpan Semiconductor, Inc.
dated January 1, 1999.
</TABLE>
II-2
<PAGE> 77
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
<S> <C> <C>
10.12(1) -- Lease Agreement between Paradyne and Townsend Property Trust Lease, dated June 27, 1997.
10.13(l) -- Key Employee Agreement between Paradyne and Thomas Epley, dated April 1, 1999.
10.14(1) -- Employment Agreement between Paradyne and Andrew May, dated December 3, 1996.
10.15(l) -- Key Employee Agreement between Paradyne and Patrick Murphy, dated August 1, 1996.
10.16(l) -- Key Employee Agreement between Paradyne and James Slattery, dated August 1, 1996.
10.17(l) -- Change in Control Agreement between Paradyne and Sean Belanger.
10.18(l) -- Promissory Note, dated May 5, 1997, by James L. Slattery.
10.19(1) -- Promissory Note, dated March 29, 1999, Sean E. Belanger.
10.20(1) -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.21(1) -- Promissory Note, dated March 26, 1999, Paul H. Floyd.
10.22(1) -- Promissory Note, dated March 26, 1999, Frank J. Weiner.
10.23(1) -- Promissory Note, dated March 26, 1999, by Frank J. Weiner.
10.24(1) -- Promissory Note, dated April 2, 1999, Frank L. Weiner.
10.25(1) -- Promissory Note, dated Match 27, 1999, Mark Housman.
10.26(1) -- Promissory Note, dated March 31, 1999, Andrew S. May.
10.27(1) -- Promissory Note, dated March 31, 1999, Patrick M. Murphy.
10.28(l) -- Promissory Note, dated April 2, 1999, Patrick M. Murphy.
10.29(l) -- Indemnification Agreement between Paradyne and William Stensrud, dated November 6, 1996.
10.30+(1) -- Supply Agreement between Paradyne and Lucent Technologies, Inc., dated July 31, 1996.
10.31+(1) -- Exclusivity and Amendment Agreement between Paradyne, Lucent Technologies, Inc., and
GlobeSpan Semiconductor, Inc. dated August 6, 1998.
10.32+(1) -- Noncompetition Agreement between Paradyne, Communication Partners, L.P., Lucent
Technologies, Inc., and GlobeSpan Semiconductor, Inc. dated July 31, 1996.
10.33(l) -- Trademark and Patent Agreement between Paradyne, Lucent Technologies, Inc., and GobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.34(l) -- Tax Matters Agreement between Paradyne, Lucent Technologies, Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.35(l) -- Intellectual Property Agreement between Paradyne, Lucent Technologies. Inc., and GlobeSpan
Semiconductor, Inc. dated July 31, 1996.
10.36+(1) -- OEM Agreement between Paradyne and Xylan Corporation, dated March 16, 1999.
10.37+(1) -- Distribution Agreement between Paradyne and Tech Data Corporation, dated September 21,
1993.
10.38+(1) -- OEM Agreement between Paradyne and Premisys Communications, Inc., dated December 4,
1992.
10.39(1) -- Network Management Partners Agreement between Paradyne and Ascend Communications, Inc.,
dated November 3, 1998.
10.40+(1) -- Joint Development and Distribution Agreement between Paradyne and AG Communication
Systems Corporation, dated June 10, 1998.
10 41+(1) -- Marketing & License Agreement between Paradyne and NetScout Systems, Inc., dated
January 26, 1998.
10.42(l) -- Amendment No. 2 to Loan and Security Agreement.
10.43+(1) -- Amendment to Supply Agreement between Paradyne and Lucent Technologies, Inc., dated as of
May 5, 1999.
10.44(2) -- Form of Indemnification Agreement between Paradyne and Messrs. Belanger, Bonderman,
Epley, Geeslin, May, Murphy, Slattery, Stanton, Stensrud, and Van Camp.
10.45(2) -- Promissory Note, dated July 1, 1999, J. Scott Eudy.
10.46(2) -- Promissory Note, dated July 1, 1999, J. Scott Eudy.
10.47 -- Amendment No. 1 to Loan and Security Agreement.
10.48 -- Amendment No. 3 to Loan and Security Agreement.
10.49 -- Amendment No. 4 to Loan and Security Agreement.
10.50 -- Amended Agreement between Paradyne and James L. Slattery.
21 -- Subsidiaries of Paradyne Networks, Inc. List of Subsidiaries.
23.1 -- Consent of Independent Accountants.
24.1 -- Power of Attorney (see page ___)
27.1 -- Financial Data Schedule for EDGAR filing for SEC use only
</TABLE>
- -------------------
(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(No. 333-76385) or amendments thereto and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Statement on Form S-1 (No. 333-
86965) or amendments thereto and incorporated herein by reference.
II-3
<PAGE> 78
EXHIBITS
EXHIBIT
NUMBER
10.47 Amendment No. 1 to Loan and Security Agreement
10.48 Amendment No. 3 to Loan and Security Agreement
10.49 Amendment No. 4 to Loan and Security Agreement
10.50 Amended Agreement between Paradyne and James L. Slattery
21 Subsidiaries of Paradyne Networks, Inc. List of Subsidiaries
<PAGE> 1
Exhibit 10.47
FIRST AMENDMENT AND CONSENT AGREEMENT
THIS FIRST AMENDMENT AND CONSENT AGREEMENT ("Amendment"), dated as of
August 25, 1997, is made by and among BANKAMERICA BUSINESS CREDIT, INC., a
Delaware corporation ("Lender") and PARADYNE CORPORATION, a Delaware corporation
("Borrower").
R E C I T A L S:
1. Lender and Borrower are parties to that certain Loan and Security
agreement dated as of July 31, 1996 (as amended by this Amendment and as may be
further amended from time to time, (the "Loan Agreement"), pursuant to which
Lender extended credit to Borrower; and
2. Borrower has requested that Lender enter into this Amendment and
provide certain consents, as required by the Loan Agreement and the other Loan
Documents (as defined in the Loan Agreement), all as set forth in greater
detail below;
NOW, THEREFORE, for and in consideration of the mutual covenants and
agreements contained herein, and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties covenant
and agree as follows:
AGREEMENT:
1. Defined Terms. Capitalized terms used herein without definition
shall have the respective meanings set forth in the Loan Agreement.
2. Amendments to Loan Agreement. Effective upon Lender's application of
the cash proceeds received pursuant to Section 3(c) below (except that the
amendment described in Section 2(c) below shall be effective upon the Effective
Date (as defined in Section 5 below)):
(a) Section 1.1 of the Loan Agreement is hereby amended by deleting
subsection (i) of subparagraph (b) in the definition of "Availability" in its
entirety, and inserting in its place the following:
"(i) eighty-five percent (85%) of the Net Amount of Eligible
Accounts, and"
(b) Section 1.1 of the Loan Agreement is hereby amended by deleting
subparagraph (a) in the definition of "Reserve Calculation Amount" in its
entirety, and inserting in its place the following:
1
<PAGE> 2
"(a) the Net Amount of Eligible Accounts as of such date
multiplied by the Percentage, if any, by which the actual dilution
of all Accounts over the previous twelve (12) month period exceeds
five percent (5%); and"
(c) Section 10.17 of the Loan Agreement is hereby amended by
deleting such section in its entirety, and inserting in its place the following:
"10.17 New Subsidiaries. The Borrower shall not, directly or
indirectly, organize or acquire any Subsidiary other than (a) a
wholly-owned "commission" Foreign Sales Corporation to act as an
international marketing agent for Borrower, provided that such
Subsidiary will never hold title or exert ownership control over any
of the Collateral and that such Subsidiary will execute a guaranty
in form and substance satisfactory to the Lender guaranteeing the
Obligations of the Borrower, and (b) a Subsidiary to engage in the
XDSL modem and associated product business (the "Broadband
Subsidiary"), provided that upon the formation of the Broadband
Subsidiary this Agreement shall be amended to include the Broadband
Subsidiary as a borrower hereunder or as a guarantor of the
Obligations as the Lender may elect, all on terms and conditions
(including, without limitation, Liens on its assets in favor of the
Leader) and pursuant to documentation in form and substance
satisfactory to the Lender."
3. Consents by Lender
(a) Pursuant to Section 7.4(d) and any other applicable provisions
of the Loan Agreement, Lender hereby approves of and consents to the sale of
that certain technology, inventory and test equipment owned by Borrower and
transferred to Access Beyond, Inc. under the terms of that 2290 Remote Access
Gateway ("Hawk") Technology Transfer Agreement between Borrower and Access
Beyond, Inc. dated May 2, 1997.
(b) Pursuant to Section 7.4(d) and any other applicable provisions
of the Loan Agreement, Lender hereby approves of and consents to the sale of
that certain used equipment owned by Borrower and transferred to Telcor
Communications Inc. ("Telcor") under the terms of that certain Agreement for the
Sale and Purchase of Paradyne Corporation's Used Equipment dated June 27, 1997
(the "Telcor Agreement")" provided that (i) Borrower files such Uniform
Commercial Code financing statements and takes such further action as may be
necessary in order to perfect with first priority the security interest granted
to it by Telcor in paragraph 4.2 of the Telcor Agreement, and (ii) Borrower
files assignments of such financing statements and takes such further action as
Lender may require to reflect of record Lender's status as assignee, and to
perfect with first priority Lender's security interest in the obligations owing
by Telcor to Borrower under the Telcor Agreement.
2
<PAGE> 3
(c) Pursuant to Sections 7.4(d), 10.7, 10.13(g) and any other
applicable provisions of the Loan Agreement, Lender hereby approves of and
consents to the Borrower's sale to Rental Acquisition Corp. ("RentalCo") of the
lease receivables and fixed assets described in that certain Rental Co /
Paradyne Asset Purchase Agreement between Borrower and RentalCo dated as of
August 29, 1997, for a purchase price in cash for such lease receivables of the
greater of their net book value or $2,000,000, and a purchase price in cash for
such fixed assets of $300,000; provided that the cash proceeds so received are
applied as a payment of the Revolving Loans under the Loan Agreement.
(d) Lender agrees to execute and deliver such instruments or
agreements as may be necessary to effect a release of Lender's security interest
in the Collateral transferred under the transactions described in Sections 3(a),
(b) and (c) herein.
(e) Pursuant to Section 10.11(f), 10.12 and 10.13 of the Loan
Agreement, Lender hereby approves of and consents to a $5,000,000 loan from
Paradyne Partners, L.P. to Borrower (the "Partners Loan") on the terms set forth
in the Subordinated Revolving Promissory Note dated August 25, 1997 (a copy of
which is attached hereto as Exhibit A), provided that such Partners Loan will
be an unsecured loan and subordinated to the Obligations by the terms of that
certain Subordination Agreement executed by the Borrower, Lender and Paradyne
Partners, L.P. substantially in the form of that attached hereto as Exhibit B.
4. Representations and Warranties. The Borrower hereby represents and
warrants to Lender as follows:
(a) The execution, delivery and performance by the Borrower of this
Amendment have been duly authorized by all necessary corporate and other Action
and do not and will not (i) require any registration with, consent or approval
of, notice to or action by, any person (including any governmental authority)
in order to be effective and enforceable, (ii) contravene the terms of the
Borrower's Certificate of Incorporation or bylaws, or (iii) conflict with, or
result in any breach or contravention of, any other document to which the
Borrower is a party or any order, injunction, writ or decree of any governmental
authority to which the Borrower or its property is subject. The Loan Agreement
as amended by this Amendment constitutes a legal, valid and binding obligation
of the Borrower, enforceable against the Borrower in accordance with its
respective terms, without defense, counterclaim or offset.
(b) True and correct copies of the agreements referred to in
Sections 3(a), (b) and (c) hereof, have been delivered by the Borrower to the
Lender.
(c) All representations and warranties of the Borrower contained in
the Loan Agreement and the other Loan Documents are true and correct as though
made on and as of the date hereof (except to the extent such representations
and warranties specifically relate to an earlier date, in which case they were
true and correct as of such
3
<PAGE> 4
earlier date, and except as specifically disclosed in the quarterly
representations of the Borrower's Chief Financial Officer).
5. Effective Date. This Amendment will become effective as of the date
that each of the following conditions precedent has been satisfied (the
"Effective Date"):
(a) The Lender shall have received from the Borrower an original or
counterpart copies of this Amendment duly executed by the Borrower and Paradyne
Canada, Ltd.
(b) All representations and warranties contained herein and in the
Loan Agreement and other Loan Documents are true and correct as of the date that
the original or counterpart copies referred to in Section 5(a) are received by
Lender (except to the extent such representations and warranties specifically
relate to an earlier date, in which case they were true and correct as of such
earlier date, and except as specifically disclosed in the quarterly
representations of the Borrower's Chief Financial Officer), and no Event of
Default exists as of the date such original or counterpart copies are received
by Lender.
6. Miscellaneous.
(a) This Amendment shall be binding upon and shall inure to the
benefit of the parties hereto and each of their respective successors and
assigns.
(b) This Amendment shall be governed by and construed in accordance
with the law of the State of California.
(c) This Amendment may be executed in any number of counterparts,
each of which shall be deemed an original, but all of which, when taken
together, shall be deemed to constitute but one and the same instrument.
(e) This Amendment, together with the Loan Agreement and the other
Loan Documents, contains the entire and exclusive agreement of the parties
hereto with reference to the matters discussed herein and therein, and cannot be
amended, modified or supplemented except by an instrument in writing executed by
each party hereto. This Amendment supersedes all prior drafts and communications
with respect thereto.
(f) If any term or provision of this Amendment shall be deemed
prohibited by or invalid under any applicable law, such provision shall be
invalidated without affecting the remaining provisions of this Amendment or the
Loan Agreement, respectively.
(g) Without limiting any provisions of any of the Loan Documents:
(i) Borrower agrees to pay on demand all costs and expenses of Lender in
connection with the preparation, execution, delivery and enforcement of this
Amendment, including,
4
<PAGE> 5
without limitation, the reasonable fees and expenses of counsel for Lender
with respect thereto and with respect to advising Lender as to its rights and
responsibilities hereunder; and (ii) Borrower, agrees to execute and deliver
such instruments and documents and take such other action as Lender shall deem
necessary or advisable in order to carry out the intent of this Amendment.
(h) The execution, delivery and effectiveness of this Amendment
shall not, except as expressly provided herein, operate as a waiver of any
right, power or remedy of Lender under the Loan Documents, nor constitute a
waiver of any provisions of the Loan Documents. The Loan Documents are and
shall continue to be in full force and effect and are hereby in all respects
ratified and confirmed.
IN WITNESS WHEREOF, the parties hereto have executed and delivered
this Amendment as to the date first above written.
BANKAMERICA BUSINESS CREDIT, INC.
By: /s/ Gary Whitaker
---------------------------------
Name: Gary Whitaker
Title: VP
PARADYNE CORPORATION
By: /s/ Patrick Murphy
---------------------------------
Name: Patrick Murphy
Title: CFO
The undersigned, Paradyne Canada, Ltd. ("Guarantor"), hereby
acknowledges the terms and conditions agreed to by Lender and Borrower under the
foregoing Amendment, and affirms and agrees that (a) the execution and delivery
by the Borrower and that performance of this Amendment shall not in any way
amend, impair, invalidate or otherwise affect any of the obligations of
Guarantor or the rights of the Lender under that certain Guaranty executed by
Guarantor for the benefit of the Lender on July 31, 1996 ("Guaranty"), or any
other document or instrument made or given by
5
<PAGE> 6
Guarantor in connection therewith, (b) the term "Indebtedness" as used in the
Guaranty includes, without limitation, the Obligations of the Borrower under the
Loan Agreement as amended by this Amendment, and (c) the Guaranty remains in
full force and effect and is in all respects ratified and confirmed.
PARADYNE CANADA, LTD.
By: /s/ Patrick Murphy
---------------------------------
Name: Patrick Murphy
Title: VP
6
<PAGE> 7
EXHIBIT A
SUBORDINATED REVOLVING PROMISSORY NOTE
$5,000.000 Dated: August 25, 1997
FOR VALUE RECEIVED, the undersigned. PARADYNE CORPORATION, a Delaware
corporation (the "Company"), hereby promises to pay to the order of PARADYNE
PARTNERS, L.P., a Delaware limited partnership ("Partnership"), or to any other
holder of this Note (Partnership or such other holder being the "Payee"), the
principal amount of FIVE MILLION UNITED STATES DOLLARS (U.S. $5,000,000) on
August 25, 2002 (the "Maturity Date"). Subject to the terms and conditions of
this Note, amounts borrowed pursuant to this Note may be repaid and reborrowed
at any time during the term of this Note. Both principal and interest hereunder
are payable in lawful money of the United States of America to the Payee at its
principal place of business at 201 Main Street, Suite 2420, Fort Worth, Texas
76102, or at such other place as the Payee may designate from time to time in
writing (such principal place of business or other place being the "Payment
Place"), in cash or other immediately available funds. Unless otherwise defined
in the text of this Note, capitalized terms used herein shall have the meaning
ascribed 'to such terms in SECTION 10.
SECTION 1. INTEREST. The Company hereby promises to pay interest on the
unpaid principal amount of this Note from the date hereof until this Note shall
be paid in full in cash or other immediately available funds at the Applicable
Rate, payable on the last calendar day of each month during the term hereof (the
"Payment Date"), and computed on the basis of a year, of 365/6 days for the
actual number of days elapsed. Interest accruing pursuant to this SECTION 1 on
the unpaid principal amount of this Note from and after the date hereof shall be
payable in lawful money of the United States of America, in cash or other
immediately available funds, to the Payee at the Payment Place. If the Payment
Date or other date fixed for payment hereunder is not a Business Day, such
payment date shall be extended to the next succeeding Business Day, and during
any such extension, interest on the unpaid principal amount of this Note shall
accrue and be payable at the Applicable Rate as set forth in this SECTION 1.
SECTION 2. PAYMENT OF PRINCIPAL.
(a) SCHEDULED PAYMENT. On the Maturity Date, the Company shall pay to
the Payee, in cash or other immediately available funds, the entire unpaid
principal amount of this Note plus all accrued and unpaid interest thereon.
(b) OPTIONAL PREPAYMENT. Provided that no "Event of Default" (as
defined in that certain Loan and Security Agreement by and among BankAmerica
Business Credit, Inc. ("BABC") and the Company dated as of July 31, 1996, the
"Loan Agreement") has occurred and is continuing or will result from such
action, the Company may, at any time and from time to time, without premium or
penalty, prepay all or a portion of the unpaid principal amount of this Note,
together with unpaid accrued interest on the amount so prepaid to the date
chosen for prepayment, payable in cash or other immediately available funds.
<PAGE> 8
SECTION 3. EVENTS OF DEFAULT.
(a) For purposes of this Note, an "Event of Default" shall be
deemed to have occurred upon:
(i) any failure by the Company to pay all or any portion
of principal or interest under this Note when the same shall be due and payable
in accordance with the terms hereof, whether on the Maturity Date, by
acceleration or otherwise, which failure continues unremedied for a period of
30 Business Days; or
(ii) (A) the filing by the Company or any of its
Significant Subsidiaries of a voluntary petition seeking liquidation,
reorganization, arrangement or readjustment, in any form, of its debts under
Title 11 of the United States Code (or corresponding provisions of future laws)
or any other applicable bankruptcy, insolvency or similar law, or the filing by
the Company or any of its Significant Subsidiaries of an answer consenting to
or acquiescing in any such petition, (B) the making by the Company or any of its
Significant Subsidiaries of any assignment for the benefit of its creditors, or
the admission by the Company or any of its Significant Subsidiaries in writing
of its inability to pay its debts as they become due, (C) the filing of (x) an
involuntary petition against the Company or any of its Significant Subsidiaries
under Title 11 of the United States Code, or any other applicable bankruptcy,
insolvency or similar law (or corresponding provisions of future laws), (y) an
application for the appointment of a custodian, receiver, trustee or other
similar official for the Company or any of its Significant Subsidiaries for all
or a substantial part of the assets of the Company or any of its Significant
Subsidiaries or (z) an involuntary petition against the Company or any of its
Significant Subsidiaries seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief or composition of the Company or
any of its Significant Subsidiaries or any of the Company's or any such
Significant Subsidiary's debts under any other federal or state insolvency
law; provided that any such filing shall not have been vacated, set aside or
stayed within a 45 day period from the date thereof, or (D) the entry against
the Company or any of its Significant Subsidiaries of a final and nonappealable
order for relief under any bankruptcy, insolvency or similar law now or
hereafter in effect.
(b) Upon the occurrence and during the continuance of any Event
of Default described in Section 3(a)(i) or (ii), the Payee may, by
written notice to the Company, declare all or any portion of the unpaid
principal amount of this Note and all interest accrued thereon to be
immediately due and payable. Demand, presentment, protest and notice of
non-payment are hereby waived by the Company.
SECTION 4. REMEDIES CUMULATIVE. No failure to exercise or delay in
exercising any right, remedy, power or privilege hereunder shall operate as a
waiver thereof, nor shall any single or partial exercise of any right, remedy,
power or privilege hereunder preclude any other or further exercise thereof or
the exercise of any other right, remedy, power or privilege. The rights,
remedies, powers and privileges provided herein are cumulative and not
exclusive of any rights, remedies, powers and privileges provided by law.
2
<PAGE> 9
SECTION 5. NOTICES. Any notices or other communications required or
permitted hereunder shall be given in writing and personally delivered with
receipt acknowledged or mailed, postage prepaid, via registered mail, return
receipt requested, if to the Payee, at its address first set forth above or any
other address notified in writing by the Payee to the Company, and if to the
Company, at its address at 8545 126th Avenue North, Largo, Florida 33773,
Attention: Chief Financial Officer, with a copy to Texas Pacific Group, 201
Main Street, Suite 2420, Fort Worth, Texas 76102, Attention: Richard A.
Ekleberry, or any other address notified in writing by the Company to the Payee.
Any notice given in conformity with the foregoing shall be deemed given when
personally delivered or upon the date of delivery specified in the registered
mail receipt.
SECTION 6. GOVERNING LAW. This Note shall be governed by, and
construed and enforced in accordance with the law of the State of Florida as in
effect from time to time, without giving effect to any choice of laws or
conflict of laws principles thereof.
SECTION 7. SEVERABILITY. If any provision of this Note is invalid or
unenforceable in any jurisdiction, the other provisions hereof shall remain in
full force and effect in such jurisdiction and the remaining provisions hereof
shall be liberally construed in favor of the holder hereof in order to
effectuate the provisions hereof and the invalidity of any provision hereof in
any jurisdiction shall not affect the validity or enforceability of any other
provision in any other jurisdiction, including the State of Florida.
SECTION 8. SUCCESSORS AND ASSIGNS; TRANSFERABILITY. This Note shall
be binding upon and inure to the benefit of the Payee and the Company and their
respective transferees, successors and assigns.
SECTION 9. REPLACEMENT OF NOTE. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
this Note, and the Company's receipt of an indemnity agreement of the Payee
reasonably satisfactory to the Company, the Company will, at the expense of the
Payee, execute and deliver, in lieu thereof, a new Note of like terms.
SECTION 10. DEFINITIONS.
(a) For purposes of this Note, the following terms have the
following meanings:
"APPLICABLE RATE" means 8% per annum.
"BUSINESS DAY" shall mean a day other than a Saturday, Sunday
or other day on which commercial banks in Florida are authorized or required by
law to close.
"COMPANY" shall have the meaning ascribed to such term in the
first paragraph of this Note.
3
<PAGE> 10
"HOLDERS" shall mean the Payee and each other holder of all or any
portion of this Note.
"INDEBTEDNESS" shall mean any indebtedness, whether or not contingent,
for or in respect of borrowed money or evidenced by bonds, notes, debentures or
similar instruments or letters of credit (or reimbursement agreements in
respect thereof) or representing the balance deferred and unpaid of the
purchase price of any property, including pursuant to capital leases (except
any such balance that constitutes an accrued expense or a trade payable), if
and to the extent any of the foregoing indebtedness would appear as a liability
upon a balance sheet of such person or entity prepared on a consolidated basis
in accordance with generally accepted accounting principles, and including, to
the extent not otherwise included, the guaranty (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct, or indirect, in any manner (including, without limitation, letters of
credit and reimbursement agreements in respect thereof), of all or any part of
the foregoing indebtedness.
"MATURITY DATE" shall have the meaning ascribed to such term in the
first paragraph of this Note.
"PARTNERSHIP" shall mean Paradyne Partners, L.P., a Delaware limited
partnership.
"PAYEE" shall have the meaning ascribed, to such term in the first
paragraph of this Note.
"PAYMENT PLACE" shall have the meaning ascribed to such term in the
first paragraph of this Note.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization and a governmental entity or any department, agency or political
subdivision.
"SIGNIFICANT SUBSIDIARY" shall mean a "significant subsidiary" of the
Company as defined in Rule 1-02(v) of Regulation S-X under the Securities
Exchange Act of 1933, as amended, and the Securities Exchange Act of 1934, as
amended, as said Regulation may be amended from time to time, or any other
Subsidiary of the Company that has guaranteed or assumed any obligations of the
Company under this Note.
"SUBSIDIARY" shall mean any person or entity of which at least a
majority of the capital stock or other equity interests (including partnership
interests) having ordinary voting power for the election of directors or other
governing body of such person or entity is owned or controlled by the Company,
directly or indirectly through one or more subsidiaries.
(b) Unless otherwise provided herein, (i) the word "from" shall
mean from and including and (ii) the words "to" or "until" shall mean to and
until but excluding.
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<PAGE> 11
(c) All references to "Sections" of this Note shall be to
Sections of this Note unless otherwise specifically provided.
SECTION 11. SUBORDINATION TO CREDIT AGREEMENT. This Note is issued as
subordinate to the "Obligations" of the Company under the Loan Agreement in
the manner and to the extent set forth in the Subordination Agreement dated of
even date herewith among the Partnership, the Company, and BABC.
SECTION 12. DESCRIPTIVE HEADINGS. The descriptive headings of this
Note are inserted for convenience only and do not constitute a part of this
Note.
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<PAGE> 12
IN WITNESS WHEREOF, each of the Company and the Payee has caused this
Note to be executed by its duly authorized officer as of the day and year first
written above.
PARADYNE CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
PARADYNE PARTNERS, L.P.
By: Paradyne GenPar, Inc.,
its sole general partner
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
6
<PAGE> 13
Exhibit B
FORM OF
SUBORDINATION AGREEMENT
THIS SUBORDINATION AGREEMENT, dated as of___________ among Paradyne
Corporation ("Company"), Paradyne Partners, L.P. ("Partners"), and BankAmerica
Business Credit, Inc. ("BABC");
WITNESSETH:
Whereas all of the stock of Company is owned by Paradyne Acquisition
Corp. ("PAC") and all of the stock of PAC is owned by Partners, and Company
may, in each case upon offering the written consent of BABC, from time to time
in the future be indebted to Partners for loans and advances by Partners to it
(all such indebtedness and loans being hereinafter called the "Advances");
Whereas Company, pursuant to a Loan and Security Agreement dated as of
July 31, 1996, among Company and BABC, (as amended, modified or supplemented
from time to time, the "Agreement") has borrowed and will from time to time
borrow and reborrow money from BABC (which borrowings at any time outstanding,
together with interest thereon, fees of any kind in connection therewith, and
all other sums which may become due from Company to BABC or either of them and
which are included in the Obligations as that term is defined in the Agreement
are herein called the "BABC Debt");
Whereas Partners, as an inducement to BABC to continue present credit
extensions to Company and from time to time make further loans and credit
available to Company, desires to subordinate, in the manner and to the extent
herein set forth, the payment of the Advances to the due and punctual payment
of the BABC Debt:
Now, Therefore, it is mutually agreed:
1. Partners, for itself, its successors and assigns, covenants
and agrees that the payment of the principal of and interest on all Advances
now or hereafter outstanding is hereby expressly subordinated, to the extent
and in the manner hereinafter set forth, to the payment of the BABC Debt.
2. Upon the occurrence and during the continuance of an Event of
Default (as defined in the Agreement), Partners agrees that it will not demand,
collect or receive, and Company agrees that it will not make, any payments upon
the principal of, or interest on, or fees with respect to, any Advance, and
Partners further agrees that, if payment of any such amounts is received by it,
it will forthwith pay the same to BABC to be applied upon the BABC Debt in the
manner described in the Agreement.
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<PAGE> 14
3. In the event of any receivership, insolvency, bankruptcy,
assignment for the benefit of creditors, reorganization (whether or not
pursuant to bankruptcy laws), sale of all or substantially all of the assets,
dissolution, liquidation or any other marshalling of the assets and
liabilities of Company, Partners will prove, enforce and endeavor to obtain
payment of the principal of and interest on all Advances and will pay over, but
only out of and to the extent of any proceeds realized therefrom to amounts
thereof sufficient, after application of all other amounts then or theretofore
realized for payment of principal of and interest on, or other payments with
respect to the BABC Debt, to pay in full the BABC Debt, as provided in
paragraph 2 hereof; and, with respect to any receivership, insolvency,
bankruptcy, assignment for the benefit of creditors, reorganization or any
other voluntary or involuntary proceeding under any bankruptcy or insolvency
law, Partners and Company agree that BABC may, at its option, claim directly
from the trustee or representative of Company's estate in such proceeding.
Partners and Company agree to furnish all assignments, powers or other documents
requested by BABC to facilitate such direct collection by BABC or the
perfection of any interest of BABC hereunder. BABC may file claims in any such
proceeding on Partners's behalf and in no event shall Partners waive, forgive
or cancel any claim it may now or hereafter have against Company. In the event
that BABC does so elect to claim directly against the trustee or representative
of the Company's estate, Partners hereby grants to BABC an irrevocable proxy to
vote its claim in any such proceeding or at any meeting of creditors and agrees
to execute all further documents requested by BABC to facilitate exercise of
this proxy.
4. Partners covenants and agrees that, until the payment in
full of the BABC Debt, it will not sell, assign or otherwise transfer or
encumber any Advance or interest therein without first procuring and delivering
to BABC evidence in writing of the consent and agreement of the purchaser,
pledgee, assignee or transferee of such Advance or interest therein to comply
with all terms, conditions and provisions of this Subordination Agreement. The
rights of BABC hereunder shall inure to the benefit of its respective
successors and assigns.
5. BABC may at any time in its discretion renew or extend the
time of payment of the BABC Debt or exercise, fail to exercise, waive or amend
any other of its rights under any instrument evidencing or securing or delivered
in connection with any BABC debt, and in reference thereto may make and enter
into such agreements as to them may seem proper or desirable, all without
notice to or further assent from Partners, and any such action shall not in any
manner impair or affect this Subordination Agreement or any of BABCs rights
hereunder. Partners hereby waives and agrees not to assert against BABC any
rights which a guarantor or surety with respect to any indebtedness of Company
could exercise; but nothing in this Subordination Agreement shall constitute
Partners a guarantor or surety.
6. Partners and Company agree that all Advances shall be
evidenced by a promissory note or other instrument in form satisfactory to
BABC, and that upon the
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<PAGE> 15
request of BABC, Partners shall immediately deliver such promissory note or
other instrument evidencing such Advances to BABC.
7. This Subordination Agreement shall be deemed to be a contract
made under shall be construed in accordance with and governed by the laws of
the State of California.
BANKAMERICA BUSINESS CREDIT, INC.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
PARADYNE CORPORATION
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
PARADYNE PARTNERS, L.P.
By:
------------------------------
Name:
----------------------------
Title:
---------------------------
3
<PAGE> 1
Exhibit 10.48
AMENDMENT NO. 3 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 3 TO LOAN AND SECURITY AGREEMENT ("Amendment") is
dated as of July 15, 1999 and is entered into by and between Bank of America
National Trust and Savings Association ("Lender") and Paradyne Corporation
("Borrower"). All capitalized terms used herein but not otherwise defined shall
have the meanings ascribed to them in the Agreement (as hereinafter defined).
WITNESSETH
WHEREAS, the Borrower and the Lender have entered into that certain
Loan and Security Agreement dated as of July 31, 1996, as amended and
supplemented (the "Agreement"); and
WHEREAS, the Borrower desires to amend the Agreement and the Lender is
willing to do so, subject to the terms and conditions stated herein;
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Borrower and Lender hereby agree as follows:
SECTION 1. Amendment to the Agreement. The Lender and Borrower agree
that the Agreement shall be amended as follows:
A. Amendments to Section 1.1: Definitions. Section 1.1
of the Agreement is amended by adding the following definitions in the
appropriate alphabetical order:
"'Change of Control' means (a) the direct or indirect
acquisition by any person (as such term is used in Section 13(d) and Section
14(d)(2) of the Exchange Act), or related persons constituting a group (as such
term is used in Rule 13d-5 under the Exchange Act), of:
(i) beneficial ownership of issued and outstanding
shares of voting stock of the Borrower, the result of which
acquisition is that such person or such group possesses in excess of
30% of the combined voting power of all then-issued and outstanding
voting stock of the Borrower, or
(ii) the power to elect, appoint or cause the election or
appointment of at least a majority of the members of the Board of
Directors of the Borrower.
provided however, that for purposes of this definition, a
person shall not include (a) Paradyne Networks, Inc. or any affiliate or direct
or indirect subsidiary thereof or (b) any of the General and Limited Partners
of Communications Partners, L.P. or any affiliate of or entity associated with
such General or Limited Partners."
"'Exchange Act' means the Securities Exchange Act of 1934,
and regulations promulgated thereunder."
B. Amendment to Section 12. Section 12(o) of the
Agreement is amended in its entirety to read as
follows:
"(o) there occurs a Change of Control;"
- 1 -
<PAGE> 2
C. Amendment to Name of Lender. Effective as of April
1, 1999, Bank of America National Trust and Savings Association became
the successor-in-interest to BankAmerica Business Credit, Inc. All
references in the Agreement and in each Loan Document to "BankAmerica
Business Credit, Inc." or "BABC" are now amended to refer to "Bank of
America National Trust and Savings Association" which is the "Lender"
under the Agreement and the other Loan Documents.
SECTION 2. Consents. The Lender hereby consents to the following:
The non-cash dividend in the amount of approximately $350,000
by the Borrower to Globespan, Inc. which was caused by the sale of certain
equipment by the Borrower to Globespan, Inc.
SECTION 3.Conditions. The effectiveness of this Amendment is subject to
the satisfaction of the following conditions precedent:
A. Amendment. Fully executed copies of this Amendment
signed by the Borrower and a ratification signed by the Guarantor
shall be delivered to Lender.
B. Resolution. A certificate executed by the Secretary
or Assistant Secretary of Borrower certifying that the Borrower's
Board of Directors has adopted resolutions authorizing the execution,
delivery and performance by Borrower of the Amendment shall be
delivered to Lender.
C. Other Documents. Borrower shall have executed and
delivered to Lender such other documents and instruments as Lender may
require.
SECTION 4. Miscellaneous.
A. Survival of Representations and Warranties. All
representations and warranties made in the Agreement or any other
document or documents relating thereto, including, without limitation,
any Loan Document furnished in connection with this Amendment, shall
survive the execution and delivery of this Amendment and the other
Loan Documents, and no investigation by Lender or any closing shall
affect the representations and warranties or the right of Lender to
rely thereon.
B. Reference to Agreement. The Agreement, each of the
Loan Documents, and any and all other agreements, documents or
instruments now or hereafter executed and delivered pursuant to the
terms hereof, or pursuant to the terms of the Agreement as amended
hereby, are hereby amended so that any reference therein to the
Agreement shall mean a reference to the Agreement as amended hereby.
C. Agreement Remains in Effect. The Agreement and the
Loan Documents remain in full force and effect and the Borrower
ratifies and confirms its agreements and covenants contained therein.
The Borrower hereby confirms that, after giving effect to this
Amendment, no Event of Default or Default exists as of such date.
D. Severability. Any provision of this Amendment held
by a court of competent jurisdiction to be invalid or unenforceable
shall not impair or invalidate the remainder of this
- 2 -
<PAGE> 3
Amendment and the effect thereof shall be confined to the provision so
held to be invalid or unenforceable.
E. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN
DOCUMENTS EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE
AND TO BE PERFORMABLE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA.
F. Successors and Assigns. This Amendment is binding
upon and shall inure to the benefit of Lender and Borrower and their
respective successors and assigns; provided, however, that Borrower
may not assign or transfer any of its rights or obligations hereunder
without the prior written consent of Lender.
G. Counterparts. This Amendment may be executed in one
or more counterparts, each of which when so executed shall be deemed
to be an original, but all of which when taken together shall
constitute one and the same instrument.
H. Headings. The headings, captions and arrangements
used in this Amendment are for convenience only and shall not affect
the interpretation of this Amendment.
I. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH
THE OTHER LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT
BETWEEN LENDER AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF
PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER.
IN WITNESS WHEREOF, the parties have executed this Amendment under
seal on the date first written above.
PARADYNE CORPORATION
By: /s/ James Slattery
--------------------------------------
Name: James Slattery
Title: Senior Vice President
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Gary Whitaker
--------------------------------------
Name: Gary Whitaker
Title: Vice President
- 3 -
<PAGE> 4
CONSENTS AND REAFFIRMATIONS
The undersigned hereby consents to the terms and conditions of that
Amendment No. 3 to Loan and Security Agreement dated as of July 15, 1999,
between Paradyne Corporation and Bank of America National Trust and Savings
Association ("Creditor") and reaffirms its obligations under a Guaranty dated
as of July 31, 1996 (the "Guaranty") made by the undersigned in favor of the
Creditor and acknowledges and agrees that the Guaranty remains in full force
and effect.
Dated as of July 15, 1999.
PARADYNE CANADA, LTD.
By: /s/ James Slattery
--------------------------------------
Name: James Slattery
Title: Senior Vice President
- 4 -
<PAGE> 5
PARADYNE CORPORATION
SECRETARY'S CERTIFICATE
The undersigned, Secretary of Paradyne Corporation, a corporation
organized under the laws of the state of Delaware, hereby certifies that by
action of the Board or Directors of Paradyne Corporation, the following
resolutions were adopted by unanimous written consent of all of the Directors
of the Company. Said resolutions were adopted as of July 16, 1999 and remain in
full force and effect as of the date of this certificate.
NOW, THEREFORE, BE IT RESOLVED, that this Company shall enter
into an Amendment No. 3 to its Loan and Security Agreement with Bank
of America National Trust and Savings Association, and
RESOLVED FURTHER, that the officers of the Company be, and
each of them hereby is, authorized and directed to execute and deliver
on behalf of this Company such amendments and documents and to perform
such acts and make such filings as may be deemed necessary or
advisable to implement the foregoing resolution.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of said
Paradyne Corporation, this 16th day of July 1999.
(ILLEGIBLE SIGNATURE)
---------------------------------------
(SEAL) Secretary
- 5 -
<PAGE> 1
Exhibit 10.49
AMENDMENT NO. 4 TO
LOAN AND SECURITY AGREEMENT
THIS AMENDMENT NO. 4 TO LOAN AND SECURITY AGREEMENT ("Amendment") is
dated as of January 1, 2000 and is entered into by and between Bank of America,
N.A. ("Lender") (formerly known as Bank of America National Trust and Savings
Association which was the successor-in-interest to BankAmerica Business Credit,
Inc.) and Paradyne Corporation ("Borrower"). All capitalized terms used herein
but not otherwise defined shall have the meanings ascribed to them in the
Agreement (as hereinafter defined).
WITNESSETH
WHEREAS, the Borrower and the Lender have entered into that certain
Loan and Security Agreement dated as of July 31, 1996, as amended and
supplemented (the "Agreement"); and
WHEREAS, the Borrower desires to amend the Agreement and the Lender is
willing to do so, subject to the terms and conditions stated herein;
NOW, THEREFORE, in consideration of the premises herein contained and
other good and valuable consideration, the receipt and adequacy of which are
hereby acknowledged, the Borrower and Lender hereby agree as follows:
SECTION 1. Amendment to the Agreement. The Lender and Borrower agree
that the Agreement shall be amended as follows:
A. Amendment to Section 1. The definition of "Availability"
contained in Section 1 of the Agreement is amended by deleting the
words "Thirty-Five Million Dollars ($35,000,000)" and inserting in lieu
thereof the words "Thirty Million Dollars ($30,000,000)".
B. Amendment to Section 1. The definition of "Stated
Termination Date" contained in Section 1 of the Agreement is amended in
its entirety to read as follows:
"Stated Termination Date' means January 31, 2001."
C. Amendment to Section 1. Section 1 of the Agreement is
amended to add the following definitions:
"'Borrowing Base' means at any time the lesser of: (a) the
amount of Thirty Million Dollars ($30,000,000") or (b) the sum
of: (i) eighty-five percent (85%) of the Net Amount of
Eligible Accounts, and (ii) the least of: a) $6,000,000; b)
forty percent (40%) of the value of Eligible Inventory; and c)
the amount of the M&E Appraisal Less: (a) the Base Reserve
Amount; (b) the amount, if any, by which the Reserve
Calculation Amount exceeds eighty percent (80%) of the M&E
Appraisal; (c) the ACH Settlement Risk Reserve;
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<PAGE> 2
and (d) all other reserves which the Lender in its reasonable
discretion deems necessary or desirable to maintain with
respect to the Borrower's account, including, without
limitation, any amounts which the Lender may be obligated to
pay in the future for the account of the Borrower, and any tax
or other reserve relating to the Canadian Guaranty or any
Canadian Collateral.
"Revolver Outstandings means, at the time of
determination, the sum of the Revolving Loans outstanding and
the face amount of all issued and outstanding Letters of
Credit."
D. Amendment to Section 2. The first sentence of Section 2.1
of the Agreement is amended to read as follows:
"Subject to all of the terms and conditions of this
Agreement, the Lender shall make available a total credit
facility of up to $30,000,000 (the "Total Facility") for
Borrower's use from time to time during the term of this
Agreement."
E. Amendment to Section 3. Section 3.3 of the Agreement is
amended in its entirety to read as follows:
"Unused Line Fee. For every month during the term of
this Agreement, the Borrower shall pay the Lender a fee (the
"Unused Line Fee") in an amount equal to one-quarter of one
percent (0.25%) per annum multiplied by the average daily
amount by which $30,000,000 exceeded the sum of (a) the
average daily outstanding amount of Revolving Loans and (b)
the average daily undrawn face amount of all outstanding
Letters of Credit during such month, with the unpaid balance
of Revolving Loans calculated for this purpose by applying
payments immediately upon receipt. The Unused Line Fee, if
any, shall be calculated on the basis of a year of three
hundred sixty (360) days and actual days elapsed and shall be
payable to the Lender on the first day of each month with
respect to the prior month."
F. Amendment to Section 7. Section 7.2 of the Agreement is
amended by deleting the amount "$100,000" which appears in the third
sentence from the end of the section and inserting in lieu thereof the
amount "$250,000".
G. Amendment to Section 7. The second sentence of Section
7.3(b) of the Agreement is amended to read as follows:
"The Borrower covenants and agrees that neither it nor
Paradyne Canada will maintain any Collateral having a value in
excess of $250,000 in the aggregate or Canadian Collateral
having a value in excess of $250,000 in the aggregate at any
location other than those listed on Schedule 7.3, and neither
it nor Paradyne Canada will otherwise change or add to any of
such locations, unless the Borrower gives the Lender at least
30 days' prior written notice thereof and the Borrower or
Paradyne Canada executes any and all financing
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<PAGE> 3
statements and other documents that the Lender requests in
connection therewith."
H. Amendment to Section 7. Section 7.5 of the Agreement is
amended in its entirety to read as follows:
"Appraisals. Whenever a Default or Event of Default
exists, and at such other times (but not more frequently than
once a year) when the Revolver Outstandings at any time during
the prior 12 months exceeded $15,000,000, the Borrower shall,
and shall cause Paradyne Canada to, at the Borrower's expense
and upon the Lender's request, provide the Lender with
appraisals or updates thereof, including, without limitation,
M&E Appraisals, of any or all of the collateral and the
Canadian Collateral from an appraiser acceptable to the Lender
in its sole discretion."
I. Amendment to Section 7. The first sentence of Section 7.8
of the Agreement is amended to read as follows:
"Collateral Reporting. The Borrower will provide the
Lender with, and will cause Paradyne Canada to provide the
Lender with, the following documents at the following times in
form satisfactory to the Lender: (a) (i) monthly in the event
the Revolver Outstandings are ever less than $10,000,000 and
the Revolver Outstandings are less than fifty percent (50%) of
the Borrowing Base, or (ii) twice a month in the event the
Revolver Outstandings are ever greater than $10,000,000 (but
not greater than $15,000,000) or the Revolver Outstandings
ever exceed fifty percent (50%) of the Borrowing Base, or
(iii) at all other times at least three times a week, the
following: a schedule of credit memos and reports, a schedule
of collections of accounts receivable, a schedule of Accounts
created since the last such schedule and a report of the
inventory balance (by location and major categories) based on
the perpetual inventory reports as of the latest fiscal month
end; (b) upon request, copies of invoices, credit memos,
shipping and delivery documents; (c) monthly agings of
accounts receivable no later than the 10th business day of the
following month; (d) monthly inventory reports by category no
later than the 10th business day of the following month; (e)
monthly agings of accounts payable no later than the 10th
business day of the following month; (f) upon request, copies
of purchase orders, invoices, and delivery documents for
Inventory and Equipment acquired by the Borrower; (g) such
other reports as to the Collateral and the Canadian Collateral
as the Lender shall request from time to time; and (h)
certificates of an officer of the Borrower or Paradyne Canada
certifying as to the foregoing."
J. Amendment to Section 7. Sections 7.9(b), 7.9(d) and 7.9(e)
of the Agreement are amended by deleting the amount "$100,000" wherever
it appears and inserting in lieu thereof the amount "$250,000".
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<PAGE> 4
K. Amendment to Section 7. The fist, second, third and fourth
sentences of Section 7.10 of the Agreement are deleted and in lieu
thereof the following inserted:
"The Borrower shall immediately, upon receipt thereof, deposit
all proceeds of the Collateral (including all payments
received in connection with the Accounts) into a Payment
Account, which Payment Account shall be subject to the terms
of a blocked accounts agreement, on terms acceptable to
Lender, between the Borrower, the Lender and the bank. In the
event the Revolver Outstandings are at any time equal to or
greater than $15,000,000 or the Availability is less than
fifty percent (50%) of the Borrowing Base ("Triggering
Events"), the Borrower's right to withdraw funds from the
Payment Account shall terminate and only the Lender shall have
right to withdraw funds from the Payment Account. The Borrower
authorizes the Lender to notify the bank at which the Payment
Account is located upon the happening of a Triggering Event
that all funds deposited into the Payment Account are subject
solely to the direction of the Lender. In the event that
Availability is less than $2,000,000 or at any other time as
the Lender in its sole discretion shall determine, the
Borrower agrees, at the request of the Lender, to cause
Paradyne Canada to deliver all collection of Canadian
Collateral into a bank account subject to the terms of a
blocked account agreement acceptable to the Lender."
L. Amendment to Section 8. Section 8.2(c) of the Agreement is
amended in its entirety to read as follows:
"(c) With each of the annual audited Financial
Statements delivered pursuant to Section 8.2(a) and each of
the unaudited Financial Statements delivered pursuant to
Section 8.2(b) at the end of the month succeeding the close of
each fiscal quarter, a certificate of the chief executive or
chief financial officer of the Borrower (i) stating that,
except as explained in reasonable detail in such certificate,
no Default or Event of Default then exists or existed during
the period covered by such Financial Statements and (ii) if
such certificate relates to annual audited Financial
Statements, describing and analyzing in reasonable detail all
material trends, changes and developments in such Financial
Statements, and (iii) if such certificate relates to a fiscal
month which is the last month of a fiscal quarter, setting
forth in reasonable detail the calculations required to
establish the Borrower's Fixed Charge Coverage Ratio during
such fiscal quarter. Notwithstanding the foregoing no
certificate shall be required for the first and third quarter
if the Revolver Outstandings were as of the end of such
quarter less than $15,000,000. In addition to the foregoing,
the certificate which is delivered in connection with the
annual audited Financial Statements and the fiscal quarter
ending on June 30 shall state that, except as explained in
reasonable detail in such certificate, all of the
representations and warranties of the Borrower contained in
this Agreement and the other Loan Documents are correct and
complete as of the date of the certificate as if made at such
time. If such certificate discloses that a
4
<PAGE> 5
representation or warranty is not correct or complete, or that
a covenant has not been complied with, or that a Default or
Event of Default existed or exists, such certificate shall set
forth what action the Borrower has taken or proposes to take
with respect thereto."
M. Amendment to Section 8. Section 8.2(e) of the Agreement is
amended by deleting the words "30 days" and inserting in lieu thereof
the words "90 days".
N. Amendment to Section 10. Section 10.10 of the Agreement is
amended by deleting the amount "$500,000" and inserting in lieu thereof
the following "$2,000,000, provided, however, Borrower shall give
written notice to Lender of such Guarantees."
SECTION 2. Conditions. The effectiveness of this Amendment is subject
to the satisfaction of the following conditions precedent:
A. Amendment. Fully executed copies of this Amendment signed
by the Borrower and a ratification signed by the Guarantor shall be
delivered to Lender.
B. Resolution. A certificate executed by the Secretary or
Assistant Secretary of Borrower certifying that the Borrower's Board of
Directors has adopted resolutions authorizing the execution, delivery
and performance by Borrower of the Amendment shall be delivered to
Lender.
C. Other Documents. Borrower shall have executed and delivered
to Lender such other documents and instruments as Lender may require.
SECTION 3. Miscellaneous.
A. Survival of Representations and Warranties. All
representations and warranties made in the Agreement or any other
document or documents relating thereto, including, without limitation,
any Loan Document furnished in connection with this Amendment, shall
survive the execution and delivery of this Amendment and the other Loan
Documents, and no investigation by Lender or any closing shall affect
the representations and warranties or the right of Lender to rely
thereon.
B. Reference to Agreement. The Agreement, each of the Loan
Documents, and any and all other agreements, documents or instruments
now or hereafter executed and delivered pursuant to the terms hereof,
or pursuant to the terms of the Agreement as amended hereby, are hereby
amended so that any reference therein to the Agreement shall mean a
reference to the Agreement as amended hereby.
C. Agreement Remains in Effect. The Agreement and the Loan
Documents remain in full force and effect and the Borrower ratifies and
confirms its agreements and covenants contained therein. The Borrower
hereby confirms that, after giving effect to this Amendment, no Event
of Default or Default exists as of such date.
5
<PAGE> 6
D. Severability. Any provision of this Amendment held by a
court of competent jurisdiction to be invalid or unenforceable shall
not impair or invalidate the remainder of this Amendment and the effect
thereof shall be confined to the provision so held to be invalid or
unenforceable.
E. APPLICABLE LAW. THIS AMENDMENT AND ALL OTHER LOAN DOCUMENTS
EXECUTED PURSUANT HERETO SHALL BE DEEMED TO HAVE BEEN MADE AND TO BE
PERFORMABLE IN THE STATE OF CALIFORNIA AND SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA.
F. Successors and Assigns. This Amendment is binding upon and
shall inure to the benefit of Lender and Borrower and their respective
successors and assigns; provided, however, that Borrower may not assign
or transfer any of its rights or obligations hereunder without the
prior written consent of Lender.
G. Counterparts. This Amendment may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an
original, but all of which when taken together shall constitute one and
the same instrument.
H. Headings. The headings, captions and arrangements used in
this Amendment are for convenience only and shall not affect the
interpretation of this Amendment.
I. Expenses. The Borrower agrees to pay a legal documentation
fee of $1,500, which Borrower authorizes Lender to charge to Borrower's
Loan Account.
J. NO ORAL AGREEMENTS. THIS AMENDMENT, TOGETHER WITH THE OTHER
LOAN DOCUMENTS AS WRITTEN, REPRESENTS THE FINAL AGREEMENT BETWEEN
LENDER AND BORROWER AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE
NO UNWRITTEN ORAL AGREEMENTS BETWEEN LENDER AND BORROWER.
[Remainder of page left intentionally blank]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this Amendment under seal
on the date first written above.
PARADYNE CORPORATION
By: /s/ Patrick Murphy
------------------------------
Name: Patrick Murphy
Title: Chief Financial Officer
BANK OF AMERICA, N.A.
By: /s/ Gary Whitaker
------------------------------
Name: Gary Whitaker
Title: Vice President
7
<PAGE> 8
CONSENTS AND REAFFIRMATIONS
The undersigned hereby consents to the terms and conditions of that
Amendment No. 4 to Loan and Security Agreement dated as of January 1, 2000,
between Paradyne Corporation and Bank of America, N.A. (formerly known as Bank
of America National Trust and Savings Association) ("Creditor") and reaffirms
its obligations under a Guaranty dated as of July 31, 1996 (the "Guaranty") made
by the undersigned in favor of the Creditor and acknowledges and agrees that the
Guaranty remains in full force and effect.
Dated as of January 1, 2000.
PARADYNE CANADA, LTD.
By: /s/ [ILLEGIBLE]
------------------------------
Name:
Title:
8
<PAGE> 9
PARADYNE CORPORATION
SECRETARY'S CERTIFICATE
The undersigned, Secretary of Paradyne Corporation, a corporation
organized under the laws of the state of Delaware, hereby certifies that by
action of the Board or Directors of Paradyne Corporation, the following
resolutions were adopted by unanimous written consent of all of the Directors of
the Company. Said resolutions were adopted as of January 12, 2000 and remain in
full force and effect as of the date of this certificate.
NOW, THEREFORE, BE IT RESOLVED, that this Company shall enter
into an Amendment No. 4 to its Loan and Security Agreement with Bank of
America, N.A. (formerly Bank of America National Trust and Savings
Association), and
RESOLVED FURTHER, that the officers of the Company be, and
each of them hereby is, authorized and directed to execute and deliver
on behalf of this Company such amendments and documents and to perform
such acts and make such filings as may be deemed necessary or advisable
to implement the foregoing resolution.
IN WITNESS WHEREOF, I have hereunto set my hand and seal of said
Paradyne Corporation, this 12 day of January 2000.
/s/ [ILLEGIBLE]
------------------------------
(SEAL) Secretary
9
<PAGE> 1
EXHIBIT 10.50
GREEMENT BETWEEN JAMES L. SLATTERY
In December 1999, at Mr. Slattery's request in anticipation of his
desire to retire in August 2000, Mr. Slattery's schedule was reduced to no more
than twenty-five (25) hours per week with a commensurate reduction in, his
compensation.
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION
OF
NAME INCORPORATION
- ---- -------------
<S> <C>
PARADYNE CORPORATION Delaware
Paradyne Worldwide Corp. Delaware
Paradyne Canada Ltd. Ontario Canada
Paradyne Japan Corporation Japan
Paradyne International Ltd. United Kingdom
Paradyne GmbH Germany
Paradyne International Sales Ltd. Barbados
Paradyne Finance Corporation Delaware
Ark Electronic Products Inc. Florida
Communcations Equipment Corporation Delaware
</TABLE>
<PAGE> 1
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 333-83073) of Paradyne Networks, Inc. of our report
dated January 19, 2000 relating to the financial statements and financial
statement schedules, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------------------
PricewaterhouseCoopers LLP
Tampa, Florida
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<EXCHANGE-RATE> 1
<CASH> 62,885
<SECURITIES> 0
<RECEIVABLES> 33,570
<ALLOWANCES> 4,022
<INVENTORY> 13,252
<CURRENT-ASSETS> 110,896
<PP&E> 32,799
<DEPRECIATION> 15,502
<TOTAL-ASSETS> 130,485
<CURRENT-LIABILITIES> 24,545
<BONDS> 0
0
0
<COMMON> 31
<OTHER-SE> 105,653
<TOTAL-LIABILITY-AND-EQUITY> 130,485
<SALES> 220,174
<TOTAL-REVENUES> 225,909
<CGS> 124,125
<TOTAL-COSTS> 124,948
<OTHER-EXPENSES> 36,470
<LOSS-PROVISION> 32
<INTEREST-EXPENSE> (405)
<INCOME-PRETAX> 11,368
<INCOME-TAX> 3,479
<INCOME-CONTINUING> 11,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,889
<EPS-BASIC> .28
<EPS-DILUTED> .26
</TABLE>
